The slowing Chinese economy (after 25 years of amazing growth) has been a consistent theme in the international news for at least a year. The level of attention makes sense because the People’s Republic now occupies such a central place in the global economy. Virtually every country in the world is impacted by China’s economy now.
While engaged in a transitional period away from manufacturing and toward consumption, China is definitely experiencing some growing pains. The worrisome part is how the Chinese government handles this transition. This is especially true considering how involved the Communist regime is in planning and orchestrating the country’s $10 trillion economy.
In response to the slowing growth and increasing amounts of bad debt in China, both the Standard & Poor’s and Moody’s downgraded their outlook for China to negative. The same was done for Hong Kong.
Both agencies did, however, refrain from lowering the country’s AA- credit rating. (Hong Kong also maintained its rating of AAA.) Compared to other emerging markets (and even many affluent economies), these are strong ratings. This doesn’t rule out that the country’s credit won’t be downgraded in the near future, but it nonetheless has Chinese officials concerned.
There are a number of reasons to be concerned about China. S&P stated that “the economic and financial risks to the Chinese government’s creditworthiness are gradually increasing,” indicating that rebalancing the economy and decelerating credit growth should be two of its primary goals.
In order to artificially stave off the decline in its GDP growth, China has merely been increasing credit (debt) at a cheaper rate and faster pace. This measure only helps in the short-term and increases the country’s level of debt relative to the size of the economy.
However, these economic imbalances are unlikely to abate very soon, even though S&P predicts that the country will still experience better than 6% growth over the next three years. (Most countries would kill for that kind of economic expansion, but it is a far cry from China’s annual growth over the past quarter-century.) It’s even projected to pass the U.S. to become the world’s biggest oil importer this year.
Of major concern are the great deal of bad debt in property lending (i.e. housing and real estate) and especially nonperforming loans to industrial companies that are under water.
As part of its shift from an investment- and production-based to service- and consumption-based economy, Chinese companies have been increasing the number of foreign deals they engage in. Already this year, $113 billion in foreign acquisitions have been secured by Chinese firms. This already surpasses the annual total of 2014 and is approaching 2015’s record-setting total of $121 billion.
In the past, these Chinese firms made strong attempts to secure natural resources and raw commodities overseas, but the current purchases far outpace these kinds of mining acquisitions. They are also far more diverse. According to Bloomberg, “cash-rich Chinese buyers, often backed by generous lending from state banks, are trying to diversify into everything from lodging, cranes and pesticides to semiconductors, flat-screen TVs and Hollywood studios in a quest to expand into new global markets and key technologies.”
It also makes sense for corporate China to start piling up foreign assets as the yuan continues to face devaluation risks. Yet, regulators abroad are understandably skeptical about some of the proposed deals. In the U.S. and Canada, for example, offers from Chinese buyers have been closely scrutinized and sometimes even rejected due to security concerns and general distrust.
China will have to learn to navigate these kinds of deals if it is to avoid further downturns in its economy. It may already be almost everyone’s top trading partner, but China is now seeking to become a major player in owning global assets.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.