{"id":709,"date":"2016-05-09T00:10:17","date_gmt":"2016-05-09T06:10:17","guid":{"rendered":"https:\/\/trends.ufm.edu\/en\/?post_type=articulo-semanal&p=709"},"modified":"2016-11-28T15:28:17","modified_gmt":"2016-11-28T21:28:17","slug":"mixed-feelings-about-china","status":"publish","type":"articulo-semanal","link":"https:\/\/trends.ufm.edu\/en\/article\/mixed-feelings-about-china\/","title":{"rendered":"Mixed Feelings about China"},"content":{"rendered":"

By Ricardo Rivera May 9, 2016<\/p>\n

Translated from Spanish by Katarina Hall<\/p>\n

rrivera@ufm.edu<\/a><\/p>\n

 <\/p>\n

The rise of China\u2019s stock market in early April signaled that the world\u2019s second largest economy is not in the terrible conditions that many believed. The recovery of exports in March\u2014which broke the streak of nine months without any growth\u2014seems to have convinced many that China is not going through a hard landing. Moreover, China\u2019s expected deflation has yet to come. The People\u2019s Bank of China has ceased melting reserves to defend its currency, and this year the yuan has strengthened against the dollar, causing the country\u2019s capital outflow to slow down. Everything seems to be good news: the country\u2019s exports rose almost 11% in March, the Chinese stock market recovered against the falls of Nikkei in Japan and Senesex in India, and investors have renewed faith because of the IMF\u2019s projected growth for China.<\/p>\n

But to the extent that doubts about China\u2019s economic performance in the short term are cast aside, in the distance there is still a dense fog. It is important to remember that China\u2019s economic growth numbers are the cornerstone upon which the legitimacy of the regime is held. Therefore, the regime must also incur great economic costs to sustain the political order.<\/p>\n

 <\/p>\n

\"A.57<\/a>

Source: Bloomberg<\/p><\/div>\n

 <\/p>\n

China\u2019s debt-to-GDP ratio has been increasing for quite some time. The steady increase of China\u2019s leverage since 2008, to sustain the high expectations for growth rates until 2015, has put pressure on China\u2019s ability to continue to borrow. To reach the growth target of between 6.5 and 7 percent, China will have to face great challenges in the next 5 years. These high leverage ratios have been sustained for so long that they have degraded the system\u2019s liquidity, leaving it more vulnerable to an economic and financial shock.<\/p>\n

Leverage only makes sense when the assets acquired are more profitable than the cost of borrowed funds. In other words, if China\u2019s debt investment were efficiently allocated there wouldn\u2019t be a problem. China\u2019s growth rate of 6.9 signals the same. However, when it comes to a centrally planned economy, it is necessary to compare two kinds of growth: quantitative and qualitative.<\/p>\n

It can be assumed that no matter which sector gets the borrowed funds, these will still be reflected as GDP growth. This nominal growth, however, does not necessarily mean real growth. In other words, it does not imply that the funds were efficiently allocated to profitable sectors. Even though authorities announced a credit cut to non-profitable companies and industries operating at a loss, it is alarming that the allocation mechanisms are flooding sectors of the economy that are not profitable with borrowed funds. If the returns of companies fall faster than the nominal interest rate, China will find itself in a bad situation. One can assume that the list of defaulted companies in China\u2019s stock will increase in the next couple of months. Yet, there are two important things that are still unknown: 1. Will these companies default because of the government\u2019s plan or as a symptom of erosion in their capacity to fulfill their obligations? 2. How will the stock market react?<\/p>\n

Nowadays, no one talks of China\u2019s sorpasso<\/em> of the United States economy\u2014an issue that was in fashion some years ago. Today, the main concern is whether China can effectively avoid a Japanese-style middle-income trap. One can conclude that the strengthening of the construction and export sectors in the short term is being done at the expense of a higher hard landing risk in the long term.<\/p>\n","protected":false},"excerpt":{"rendered":"

The rise of China\u2019s stock market in early April signaled that the world\u2019s second largest economy is not in the terrible conditions that many believed. The recovery of exports in March\u2014which broke the streak of nine months without any growth\u2014seems to have convinced many that China is not going through a hard landing. <\/p>\n","protected":false},"author":107,"featured_media":708,"comment_status":"open","ping_status":"closed","template":"","meta":{"anio":"","mes":"","id_estadisticas":"","newsletter_link":"","portada_informe":"","subtitulo":"","footnotes":""},"tags":[8],"class_list":["post-709","articulo-semanal","type-articulo-semanal","status-publish","has-post-thumbnail","hentry","tag-china"],"_links":{"self":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/709","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal"}],"about":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/types\/articulo-semanal"}],"author":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/users\/107"}],"replies":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/comments?post=709"}],"version-history":[{"count":1,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/709\/revisions"}],"predecessor-version":[{"id":710,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/709\/revisions\/710"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/media\/708"}],"wp:attachment":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/media?parent=709"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/tags?post=709"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}