Is China immune to the investment crisis?
In the Western world we have become so used to the word ‘recession’ that any country that continues growing at rates approaching 10% seems like a miracle. Not only has China been able to do this, but the huge stockpiles of cash on which the Chinese Central Bank sits has turned the country into something of the world’s lender of last resort.
How has China escaped the financial crisis, so far and can this phenomenon be sustained for years if not decades to come?
The Chinese economic miracle was built on export-led growth. To an extent China and the US are mirror images; China needs US markets to sell its ever-growing stockpiles of consumer goods and the US needs China’s cash reserves to fund its seemingly out of control budget deficit.
Fig 3.20 clearly shows the decline in the relative value of the USD this trade imbalance has brought about.
The financial crisis
The fact that China’s growth has depended so heavily on US and European consumer spending is, of course, also that country’s Achilles heel. When the financial crisis hit the US and subsequently Europe, it also had a more severe effect on the Chinese economy than most Westerners are aware of.
The declining demand for Chinese exports in the US and Europe led to many Chinese export companies having to close their doors.
China was, and still is, also heavily invested in US dollar assets. The country was thus hit on two fronts by the recession in the Western world; it lost vast amounts of money on the book value of dollar-based assets and its export sector suffered badly because of decreasing demand from Western countries.
How China handled the crisis
The Chinese government took a number of steps to prevent a property bubble from developing, since they wanted to avoid a Western-style financial crisis at all costs. Although property prices have been rising steadily, these measures seem to have been largely successful, so far.
The country also dealt with the crisis by using some of its cash stockpiles to fund internal infrastructure projects and to inject cash into the Chinese banking sector. Without its huge cash reserves this would obviously not have been possible, as we now see in many Western countries.
The problem with this is that it cannot be sustained indefinitely. So far, China has managed to strike a fine balance between public and private spending, but growing public sector spending is not possible in the long run without simultaneous growth in the private sector.
Even if Western economies recover, these markets can simply not accommodate ever-increasing volumes of Chinese export products. Over the next two decades China will thus have to find a way to replace Western consumer spending with internal consumer spending, without creating the credit bubbles the West experienced. Whether this is achievable remains to be seen, although the Chinese have proved critics wrong, time and again.
The growing Chinese consumer market has opened up huge investment opportunities for Western companies. Already, the country has become the single biggest auto market in the world and new opportunities are opening up on a daily basis.
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