Is China’s Economy About To Head Off A Cliff?
It would seem like the West has a lot to envy about China. At a time when the entire World was going through a recession, China’s GDP kept growing by more than 7 percent a year. The Shanghai stock market is up 78% since October and China’s government seems ready to take the World stage as a true rival to the United States. For example, China recently launched a new global financial institution to compete with Western organizations like the IMF.
Behind all this flash though, the base of China’s economy looks like it’s in serious trouble. A number of serious economic indicators are falling apart which would be bad news for China and the entire World.
China’s economic growth is stalling
China just reported that its GDP grew 7% over the past year. While this is strong growth compared to the struggling West, it’s still the worst year for China in the last 6 years. Growth is slowing down for a few reasons.
First, Chinese consumers just aren’t spending. Retail spending fell to its lowest point in 9 years. Auto sales are also stagnating and have really only had one good year in the past decade. Despite all of the Chinese government’s talk about creating more domestic demand from its consumers, it just can’t seem to get Chinese citizens to spend. With consumer confidence lower than it was even after Lehman Brothers collapsed, it’s hard to see Chinese citizens ramping up their spending any time soon.
Fixed asset investment has been the main driver behind China’s economic growth and even this is falling apart. This spending has fallen to its lowest point since 2000. The private sector isn’t spending because the government has cracked down on loose lending standards for unprofitable projects. Think the ghost cities in China. At the same time, the government isn’t able to make up this spending because they’ve already spent a fortune on public investments and there really isn’t a need for new airports and stadiums.
When you consider all these factors, it’s a wonder that China’s economy is even as strong as it is. Considering the country’s lack of transparency, maybe it isn’t…
The stock market boom is masking a collapsing housing market
Perhaps the scariest part about China’s economy is that their housing market is collapsing. Over the last year, the price of real estate has plummeted. In fact, prices are falling faster than home prices fell in the US right after our housing bubble burst, as you can see below.
If this trend keeps going, Chinese families are going to take a bad financial hit. What’s terrifying is that most of the wealth for Chinese households comes from their homes. On average, about 75% of a Chinese household’s wealth comes from their home. As a result, most people are suffering from the collapsing housing market and aren’t benefiting from the stock market boom.
In America, it’s the opposite. About 71% of the average household’s wealth comes from its financial assets and homes make up a smaller share. When you think of how badly American housing bubble hurt our economy, it has the potential to be much, much worse in China.
Thoughts for investors
Investors need to be careful not to get carried away by the headlines. While the Chinese markets may be setting records every day, it’s just not sustainable. It’s a market bubble being driven by government policy, just like in the United States.
Keep in mind that the American stock market kept roaring along for a few years after our housing bubble popped. Then, we were hit with the biggest stock market collapse since the Great Depression. If China follows the same pattern, they’ll be there in a year or two given the state of their housing market.
Investors should take a cautious approach in the face of all these challenges. America and Europe are also struggling and a Chinese collapse could push them over the edge as well. At the same time, if the Western economies run into more problems, it doesn’t look like they can rely on China to bail them out this time around.
Investors should start moving out of the stock market before the inevitable collapse and look for ways to protect their savings, say by investing in gold. This might be the only asset to keep its value in the face of a global collapse. It might also be a good time to start shorting the Chinese markets, especially if their housing market gets even worse.
Like every other country in the World, China wants investors to think that things are just fine. In reality, serious problems are on the horizon. Investors need to get prepared because it doesn’t like the rest of the World will be.