The Chinese stock market has tanked in the last month, losing 30 per
cent of its value. That’s over $3 trillion in losses – a third of China’s GDP
and ten times the debt of Greece.
But the problem is much bigger than just the stock market.
1. The Chinese economy is slowing down
This year China cut its growth target to 7 per cent, its lowest
expansion for more than two decades. But then it would be nearly impossible for
the country to keep growing at 10 per cent as it has done for almost three
decades.
2. China keeps spending its money on building things
China’s economy is focussed on investment, rather than consumption,
exports or government spending. Eventually, it will run out of things to invest
in. There was so much investment in China’s property market, for example, that
many houses stand empty and growth has stalled – there’s even a risk property
investors might start to lose money.
3. But the Chinese government should make it easier for people to buy
things
Some economists think China must shift its economy away from investment
towards consumption. It could help that along by letting young people who
migrate from rural areas to work in the cities move to the cities, where they
could spend their money and start businesses. With extra money in their pockets,
Chinese consumers could start to spend.
4. China has a huge amount of debt
Just like poorer families in China that borrowed to invest in the stock
market, businesses and the Chinese government have borrowed money to invest in
infrastructure and property. If growth stalls, may find it very hard to pay off
those debts.
5. A one party system could stifle innovation
If everything is directed from above, it will be difficult for China’s
middle-earners – the people most likely to spearhead a production economy by
creating businesses at home – to be truly innovative. The one-party state is
unlikely to change, but there might be a loosening of governance allowing more
private enterprise.
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