Right off the bat, it’s important to make it clear that a “threat” in the true sense of the word is not something that might bring about let’s say a growth rate decrease from 10% to 6.5% but rather an event/phenomenon so dramatic that it might even generate a recession. Believe it or not, even an economic powerhouse like China is anything but immune, nor is any other nation for that matter.
Without further ado, let us get right down to business, because many of these threats speak for themselves:
- A global financial crisis, no matter where the epicenter lies and whether or not the onset of the crisis has anything to do with China. Despite being the world’s #2 economy by nominal GDP and the #1 economy by PPP GDP, there is no such thing as a Chinese asset that enjoys a “safe haven” status, neither is China itself the type of country international investors flock to when times are rough and capital gets frightened. In other words, in the event of a global financial crisis, not only are investors unlikely to want to back up the truck and stock up on Chinese assets, the exact opposite will most likely happen… even if the onset of the crisis in question had nothing whatsoever to do with China
- Demographic issues, or to keep it simple, China’s aging population. As ironic as it may seem in light of the fact that China rather (in)famously implemented a one-child policy for many years, problems for China might arise for the exact opposite reason. One need only look at Japan to see how economic trajectory-altering demographic problems can become and unlike China, Japan has decades of prosperity under its belt to act as somewhat of a cushion
- Political issues, in light of the fact that an increasingly economically powerful as well as educated middle class will have difficulties accepting the current freedom-related status quo indefinitely. As mentioned in articles such as the one about China’s Great Firewall, creative ways are being found to circumvent the various freedom-related limitations that are imposed on the average Chinese. Political turbulence invariably end up having economic consequences as well, even if they sometimes end up only being short-term ones
- Market psychology because while from a macro perspective, a compelling case can be made that China’s slowing economic growth rate can bring its trajectory toward one of economic stability, a lot ultimately depends on how market participants perceive it. If too many of them placed bets on China due to momentum-related reasons and become jittery once that momentum appears to be tapering off, there can be dire economic consequences even if (once again, ironically), a certain degree of growth rate slowdown is not just inevitable but also positive when we think about the big picture
- Trade barriers, with the United States situation obviously in the spotlight. At the end of the day, China is without a doubt a textbook example of a nation which has benefited tremendously from international trade. However, at this point and beyond, many of the economic players who were more than willing to tolerate trade deficits with a China which was finding its way out of poverty now consider China an adversary. As such, the various measures which can be taken by trading partners in an effort to narrow their trade gaps with China can have potentially (very) serious consequences even if we look at them in a stand-alone manner. In aggregate, the risk they pose is most definitely systemic
- A loss of confidence in its currency, the renminbi. While in today’s economic environment, this seems quite unlikely, what if the world eventually embarks on a trend which revolves around the population losing confidence in the various currencies that exist, as a result of initiatives such as keeping interest rates (outrageously) low or even “printing” money through quantitative easing. The same principle as with a global financial crisis would be valid in the event of a currency crisis environment, in that the confidence of the market in the renminbi would most likely prove to be less than impressive
- Various endogenous asset-related threats, anything from the collapse of China’s real estate market to a meltdown of its stock market, which has performed remarkable poorly in recent years. Some sectors are “hot” in China, others such as the stock market have seen better days. All in all, individuals but especially in aggregate, these various endogenous threats can definitely threaten China’s economic growth track record
In this author’s opinion at least, these are the top 7 threats to China’s economic growth and as a conclusion, an interesting observation arises: a lot of threats are exogenous rather than endogenous or, in other words, there are several scenarios in which China would stand to lose tremendously without being… let’s say at fault. Whether they involve a global financial crisis, market psychology, trade barriers or a loss of confidence in the renminbi, each threat most definitely represents something that could put China’s economic growth at risk. What the future holds remains to be seen, and, of course, ChinaFund.com is at your disposal if you are interested in receiving hands-on China-related feedback from an entity with a solid domestic business presence. For more information, simply visit the Consulting section of this website.