The future for the Chinese economy does not look bright, as it has taken a heavy toll on its economy post-pandemic.
China is facing the same financial crisis as the US did more than a decade ago, when its mortgage sector almost collapsed and took years to recover. China’s real estate giant Evergrande has already gone broke, and now Country Garden has announced that it too will default.
The risk grows when growth slows.
There was a time when China’s GDP was growing from 8% to 10%, so they could pay off all the bad debts. The current scenario is different; they are hardly managing 5% of the GDP.
Due to the lower inflow of money, China is finding it extremely difficult to cover up its bad debt. Thus, China is unable to solve its internal crisis, and all those cities that were developed on larger scales are now turning into ghost cities.
Before China focused on building huge infrastructures to make super cities, most Chinese resided in the countryside.
China was mostly a farming country, but small farm areas did not make sense in a global economy. So the children of farmers have been taken away from their farmlands and into cities to work in factories for the last two decades.
Today, China is highly urbanized, with fewer children. In 2005, there was demand for 30 million apartments annually; however, the demand has drastically dropped.
In China, property developers first borrow the money, build the buildings, sell them, and then return the money to the lender. The big real estate moguls, like Evergrande, borrowed a lot, built a lot, and managed to sell a few. They could not return the amount of money borrowed from the lenders. If the lenders have lent a huge amount of money and their borrowers fail to pay them back, they might also end up becoming insolvent.
Australia’s dependency on China
Australia depends heavily on China; it has failed to diversify and ended up putting all its eggs in China’s basket. In the last 20 years, Australia has heavily relied on China. If China fails to rejuvenate its financial markets, then it spells disaster for the Australian financial market. The entire Australian financial industry depends on China.
If the Chinese economy fails to recover, the unemployment rate will increase, which will prompt firms to hire fewer people and reduce their hours.
However, the Reserve Bank has some room to maneuver; it could substantially reduce official rates from 4.1%. Should China fall, the central bank should act swiftly.
- Published By Team Australia News
