A Bubble in China?

"Globalization has created this interlocking fragility.  At no time in the history of the universe has the cancellation of a Christmas order in New York meant layoffs in China." - Nassim Taleb

Over the last few years there has been plenty of speculation that the miracle that is China's economic growth would become undone and that in the very near future China would fall into a recession dragging the rest of the world with it.  The thought was that with all the over building and excess manufacturing capacity combined with rife political nepotism and its resulting inefficiencies mixed in with poor economic oversight and mismanagement, the economy would soon collapse.  Even with their massive trade balance and capital surpluses China would not be able to handle a slow 6% to 7% GDP growth. So the world held its breath as China's economic growth slowed during the recession and then speculated for a number of years that the economic spending on useless projects would soon backfire; but with China entering another year of slower GDP growth (potentially sub 7% GDP growth) it is interesting to uncover reasons that reduce the fear of an imminent collapse.

The first metric is a look at some of the cities that were essentially ghost towns a few years ago.  Zhengzhou as an example was desolated in 2013 and now is teaming with people, businesses, universities and schools.  This is not to say that housing, which was the main economic driver, will resume its ascent.  Housing prices fell 6% last year and could fall even further this year.  For this reason many builders have placed their projects on hold and are waiting for a more favorable housing environment before completing them.  This will take some of the pressure off prices and with sales of houses increasing more than 20% in 2014 over 2013 it will not be long before building resumes.

The second potential problem is their ever increasing public and private debt level.  Looking at the debt as a number it certainly shows signs of being a massive problem but digging a little deeper reveals that a lot of the debt is concentrated in government entities, construction  and property developers.  While still high, owing money to yourself is a problem that can be sorted out over time (the United States is certainly betting on this theory as well) rather than being forced upon you by outside creditors.  That said should a few large property developers who are currently in the throws of defaulting spook the market, a problem could ensue but for now it appears that these problems are contained.

The third metric is China's consumption-led growth.  With the burgeoning middle class starting to gain traction, China's consumer led consumption is on the rise.  With more and more new jobs being created in the service sector, even a slower GDP growth can be tolerated as consumer consumption can offset investment led consumption once again allowing China to handle a slower growth rate than was previously estimated.

So while it seemed like China was on the verge of collapse is appears that it may be able to dodge a bullet.  That said China's weak and flawed economic foundations still require a lot of work.  It is still difficult to move money around the country or invest abroad, options for savers and investors are limited largely to state controlled enterprises, municipalities have limited ability to control their finances or change tax structures essentially handcuffing them economically and, while they are trying to crack down on bureaucratic self dealing there is still a lot of work to be done.  All in all though it appears that things are headed in the right direction and this is a good thing for the rest of the world particularly when the global economy has become so interwoven.  So while there may still be a bubble in the Chinese stock market there is hope that the economy will be able to withstand slower growth.