How Likely Is a Chinese Economic Crash?
The thought of a Chinese economic collapse makes most investors’ blood run cold. It would threaten global stability and world markets in a way we’ve never seen before. It is the nightmare scenario.
And yet, recent evidence suggests that is exactly what is happening. A range of Chinese statistics, from its stock market to its exports, all suggest a crash is imminent.
One chart is particularly scary. It shows the history of retail sales in Hong Kong and their correlation to the economy at that time.
The chart shows that consumer demand shrinks during turbulent times. Asia’s crisis from the late 1990s appears to have had the strongest impact. It drained more than 20% from retail sales in Hong Kong.
The Middle Income Trap
A Chinese economic crash looks more and more likely. Revisions to 2015 growth statistics show the country grew at its slowest pace in 25 years. Although the growth rate was better than other countries, investors expected more than 6.9%. (Source: “China’s growth hits quarter-century low, raising hopes of more stimulus,” Reuters, January 19, 2016.)
The rate of deceleration has them worried. If it’s more rapid than Chinese officials admit, the fallout could cripple world markets. Yet the slowdown is unsurprising. Many economists have been waiting for China to fall into what is being called the “middle income trap.”
It is a common stumbling block for countries trying to make the leap into the high-income bracket. For years, China’s manufacturing base drove its gross domestic product (GDP) growth. Now that its population has grown wealthier, their spending was supposed to drive China’s economic growth. (Source: “China on the way to more quality growth,” Telegraph, February 1, 2016.)
But as Hong Kong sales show, the slowdown may be happening all too quickly.