Massive Inventory Build-up in China Troubling for the Global Economy

Massive Inventory Build-up in China Troubling for the Global EconomyWith continued concerns for the global economy now being put front and center on an almost daily basis, many hope for a resurgence of China’s growth rate. China has recently slowed sharply, partially hit by the decline in the global economy. Many economists point to the country’s monetary authorities, which have a significant impact on China’s growth rate. However, I would caution investors from thinking that China’s growth rate will resume the old trajectory anytime soon. I think it is far more likely that China’s growth rate will continue to decline, and this will put added pressure on the global economy.

While China’s growth rate still exceeds that of most countries in the global economy, I would warn investors that there are many signs of a huge slowdown. One of the biggest worries for me is that massive levels of inventory are being built up and unsold. It seems as if there is an immense oversupply and a glut of inventory in every industry I look into. This includes raw materials like iron ore, copper, cars, apartments, and goods of all kinds.

As the second largest economy, what happens to China’s growth rate does have an impact on the global economy. If inventory is sitting unsold, this means that there will be lower levels for China’s growth rate going forward. The global economy needs to work off the existing inventory.

A recent article in The New York Times included interviews with many business owners in China. An owner of a wholesale business distributing small goods such as cups, made a typical comment, stating that sales are down 50% and inventory is piling up. The same article noted that cars are also piling up in dealer showrooms; in fact, they’re having trouble finding spots to park the vehicles.

These are very troubling real-world examples of what the future holds for China’s growth rate. This is in addition to massive housing problems. Housing is a huge contributor to China’s growth rate, making up a large portion of the country’s gross domestic product (GDP). A preliminary survey by the Beijing Municipal Public Security Bureau, Population Division shows that approximately 3.8 million apartments are sitting empty in Beijing, a city of roughly 20 million people—a shocking statistic.

This build-up of inventory only has one recourse; China’s growth rate will not be as robust as it has been over the past few years, as the economy needs to work off this excess supply. That takes time, not more monetary stimulus. I think it is highly likely that this slowdown in China’s growth rate will cause the global economy to lose further steam.

While the financial authorities are trying to renew lending, reports are surfacing that loan demand is falling. This will certainly endanger China’s growth rate and impact the global economy. On top of a lack of demand, bad loans held at Chinese banks have risen for the third consecutive quarter, according to the China Banking Regulatory Commission. This is the longest stretch of bad loan increases in eight years.

With the global economy as weak as it is, there are no economic signs of a rebound in China’s growth rate. This is yet another variable for economists, as well as business leaders, to agonize over. With so many nations underperforming from their optimum levels, there needs to be a catalyst to kick-start the engine of the global economy. Many have been banking on China’s growth rate to tip the global economy back into a growth phase. I’m more worried that a lack of China’s growth rate may potentially tip the global economy into an even deeper recession.