China Credit Bubble: A Global Economic Threat

exploring the consequences of the China credit bubble

Experts are warning of a credit crunch growing in China – and the economic consequences could be worse than the 2008 U.S. banking crisis. Economists are predicting China’s economy will crash hard by 2017. The country’s growth is slowing, there has been a slew of disappointing economy data, billions have been borrowed to build infrastructure and the global demand for made-in-China products declining. All of this is putting pressure on China’s economy and creating what some are calling the China credit bubble.

A Threat Of Global Proportions

China is the second biggest economy in the world after the U.S, and it’s growing twice as fast with more than three times the population. China is also the world biggest trading nation. For example in 2012 U.S. exports and imports of goods last year totalled $3.82 trillion, but in China they totalled $3.87 trillion, according to each of the countries’ government trade department.

Tightening  The Credit Market

To counter the effects of tightening credit, China’s central bank, the People’s Bank of China has been injecting the equivalent of billions into its economy – $2.7 billion this week alone. As in the U.S., a credit crunch would pose a threat to the nation’s banks, as they need funds to be liquid in order to do business. These government cash injections are providing the banks with short term relief – but isn’t a sustainable approach.

Investment Are Backing Away

China’s economy has been growing at lightening speed and has relied heavily on foreign investments and debt, both which are now drying up. Infrastructure across the country has been built on borrowed money, with the hopes that the economy will continue to grow and flourish. Sounds all too familiar to the housing crisis in the U.S! The world’s reliance on business in China could be heavily affected; if the country flounders, many other nations will be put under economic pressure.

How Will This Affect Canada?

First of all, our already struggling trade and exports industry would take a hit; China is our second biggest trading partner after the U.S. China is a big customer of Canadian natural resources, and we’re a steady importer of Chinese merchandise. According to Statistics Canada, in 2011 Canada exported $16.3 billion to China and imported more than $48 billion. Many of the items we consume and enjoy on a day-to-day basis are made in China –  a burst of the credit bubble and subsequent collapse of the Chinese economy would cause a significant increase in the cost of these daily items. Many small businesses that buy goods from China may find it impossible to continue without this cost effective resource. China’s economic problems should be watched carefully because the repercussions would be far greater than those felt after the 2008 economic downturn – and only time will tell.

Are you worried about the impending Chinese credit collapse, or is this just the latest economic scare tactic headline?

 

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