China has too much debt, has over-built infrastructure, has youth unemployment north of 20% and is facing a slow moving economic crisis as its years of unproductive spending are coming home to roost. That is a sentence you could’ve read in an economic publication at any time over the past 5 years. China’s collapse has been called before, and this week we saw the latest round of dire predictions for the world’s second largest economy.
This article from financial research house Gavekal has taken a look at the recent reporting to try and understand if something is different this time in China.
They look at many of the leading indicators of financial crisis – the performance of the share market, the solvency of banks, exchange rates and importantly in a Chinese context, the performance of commodities (this is relevant in China because China is the #1 or #2 importer of almost every major commodity on earth, so if China is slowing down you’d expect to see weakness in key commodity markets). What Gavekal conclude is that while we’re seeing some weakness in some of these indicators, they certainly don’t appear to be anywhere close to crisis levels.
Gavekal then turn to some of the indicators of China’s domestic consumption, which again don’t suggest China is falling headfirst into an economic crisis. Car sales remain strong, Macau tourism levels are hitting multi-year highs, consumer facing companies like Alibaba are reporting strong results.
This is all to say that we should be wary of some of the most dire predictions around China. Sure, there are reasons to worry. With the collapse of Evergrande, the residential property sector is weak and (much like Australia) the Chinese consumer has a lot of their wealth tied up in residential property. Similarly, the incredibly high rates of youth unemployment are a big challenge for China’s leaders. But the majority of economic indicators out of China suggest weakness, not crisis. A reminder for us all to take that next sensationalist headline with a grain of salt.
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