Industrial overcapacity has become a time bomb that threatens the Chinese economy.
China has narrowly escaped major financial crises for over two decades. But the good times may soon be over — and not because of the recent stock market crash.
The roller coaster of Chinese stock prices this summer has triggered debates about whether China now faces a serious economic crisis. The Telegraph compared China’s equity bubbles to the situation that led to the 1929 Great Depression. The New York Times and Fortune, on the other hand, have argued that the equity bubbles are merely false alarms, and fears about China are overblown.
In the short term, the latter argument is more convincing: China’s equity crisis has affected fewer than 15 percent of Chinese households. And the majority of these middle class investors have only lost money gained a few months earlier, when stock prices spiked. Even after the recent crash, the Shanghai Stock Exchange’s Composite Index still stands 1,000 points higher than it did in July 2014. In any case, stock values are just 1.5 percent of total assets in the Chinese banking system, and most Chinese companies are not financed by the stock market. The consumer confidence index shows that the trend of growing consumption by both urban and rural Chinese remains stable. And Chinese authorities still have the power and flexibility to mobilize economic growth, for example, by loosening monetary policy to allow high liquidity of credit, or by expanding fiscal measures to stimulate household consumption.
But while the Chinese economy is unlikely to crash anytime soon, China nonetheless faces a high probability of being the next major power to face an economic collapse.