[Issue Briefing-ENG] China economy recession,20160427
IMF warns that an aeconomic crisis in Chinal could cause Globa recession again
A hard landing for Echinese econoy will likely lead An economic crisis China could result in a wolrd wide ressession, warned the International Monetary Fund(IMF) because China's finanacial links with the rest of the global economy was set to increase. It is likely that Cihna's spillovers to global financial markets will increase considerable in the next few years the warning comes at a continuing concern over the China slowdown and amid the Beijing goverments effort to shift its manufacutring dependent economy to one that is more dependent on domestic consumption. The IMF said the impact of emerging economies on developed nations had increased to such an extent that spillovers now accounted for one third of price movements across equity and foreign exchange markets of developed nations. the finanacial impact of China was alsosaid to grow because of the opening up of its local bond and otehr markets to foreign investments.
The Chinese economy has grown by an extraordinary amount over the past few decades. Chinese GDP is second in world only to the United States and many economiests believe that it is only a matter of time before China will over take the United States. Around the time John McCain named Sarah Palin as his running mate countless pixels and column inches were being dedicated to explaining why the next 100 years would be the Chniese centuty. the 2008 Summer Olyimpics in Beijing were declared the nations "coming out"party and. China's Government, however imposes capital controls in order to keep its money within its border. therefore as the Chinese middle class has grown they few options when it comes to investing their new wealth. As a result.
Chinese stocks and real estate tow of the places where Chinese people can invest. became increasingly expensive. with the hallmarks of a bubble forming. at one point last year.
the Chinese stock Market P/E ratio highter than the rest of the World's with the Chinese techonology sector showing bubble lkie valuation of more than 220 times earinings on average. To put that in perspective. the tech heavy NASDAQ market had an average P/E of 150 times beforethe dot come bubble burst. THe Chinese Stock marekts have been experienceing a correction with the goverment taking such cautionary measures as curbing short selling.Most recently in an attempt to curb volatility.China implemented circuit breakers that would halt all trading on the country stock exchanges if losses fell to 7%. MeanWhile the real estate boom had led to overproduction of building resulting in so called ghost cities. entire urbal landscpaes where nobody lives. when the market sees that the over supply cannot meet demand. prices may collapse in the Chinese housing marekt. if the Chinese economy slimps into recession it is likely to drag down the rest of the world as well.
The estimated Chinese GDP growth rates of about 7% in 2015. and forecasted to about 6-7% for 2016 are kind of hard to believe but even the most skeptical economists in China still believe its GDP growth rate will be about 3% in 2016 .A 3% growth rate is not great.
In a Recent letter to JPMorgan Chase shareholders, CEO Jamie Dimon issued a warning about the Chinese economy and the poetential 4 billion loss that a recession there could bring to the bank. although the CEO said the firm could handle it in the unlkely chance that acutally happenes. Despite China's potentail and upward trajectory. dimon states that in short run. the U.S and the rest of the world may see a major recession with massive defaults and consequently heavy trading losses.
China optimists argue that an economy expected to grow 7% on average for the next 10 years can't be considered disappointing,even if that represents a slowdown compared to previous years.
Chinese firms in 2015 is providing firms with geographical diversification and management skills they don't have at home. Because China has not yet resorted to monetary policy as a tool to fight a potential recession as the rest of the World has done. there is still a lot of space for policy to take over in case the private sector faiils. In 2015.March, The Chinese are your personal wealth has already taken a hit as a result the S&P 500 is down 11% over the past three months as markets priced in the lack of demand from China and the Dow dropped more than 30 pints on Monday. at least partly because of slowing Chinese growth.
In addition to Billionaire, George Soros has claimed that China is about to go dwon and the rest of the world could follow. according to the Soros. There is a major resemblance between China now and United States in 2007-2008 just before the U.S economy entered the Great recession. the concern is that the Cinese goverments is prioritizing growth over debt. and allowing debt to spiral out of controlIt is a short term way to keep people happy.but it leads to long term consequences in the United States. an similar siuation deveopled in 2007 and 2008 just prior to the Great Recession.
China's real estate is also on a bubble with home prices rising over 60 percent in some locations this also happened in the U.S prior to the Crash. with wages suppressed around the world and with the wealthiest hoaring cash. the world's people are increasingly relying on credit to sustain their life syte. much of this credit is bad debt. it will not be repaid.Eventually. market will agreethat too many people owe too much money and credit market will tighten.But because nearly all growth is now dependent on credit. such a tightening in credit will result in a virtually guaranteed recession.
If Chinese recession realize in recent days. China will join Russia and Brazil in the recession zone. and likely drive other emerging market economies down with them as China's once insatiable demand for their natural resources flags.
What affection with Recession with China's stock marke. t Why did China's stock markets experience a free fall during the first week of trading in 2016, the Chinese regulators erred. they installed market wide circuit breakers into their stock markets. the way a circuit breaker works is that it shouts down and closes the trading day if the market is down by specific percent. In China, its stock markets already use daily price limiet(in China, individual stock prices cannot fall by more than 10% per day) and its marginal invesotrs seem to be uniformed speculative, individual investors.
China is a place where there is not a whole lot of transparency to begin with. They anticipate the global economy to slide into recessionary territory during next year. and remain there for most of 2017. the chance of sucha global recession now stand at 55pc. staff estimated.