For years, China has been seen as a shining beacon amidst the global crisis, growing at a stunning pace while other countries reeled under the pressure of the global economic downturn of 2008-2009. However, Chinese stock market crashes, first in August 2015, and now at the start of 2016 have let people to question whether China is as immune to crisis as initially thought.
As per estimates by the Economist, Chinese equity market only impacts 15% of households. Therefore, the possibility of a widespread depression was quickly ruled out. However, there are other forces which are likely to be a greater cause of concern for the Chinese government, and possibly everyone around – the most prominent of them being the huge government and corporate debt bubble.
Looking at recent developments, there seems to be a striking resemblance between the increasingly swollen and inflated Chinese debt bubble and a simple spherical bubble, one that is impacted, shaped, and molded by a range of forces, as studied in school science books.
China is under pressure in the face of rising labor costs, industrial overcapacity, falling prices, and weak global demand. Combination of economic slowdown, excess production in manufacturing, and rising debts at the macroeconomic level may cause a massive wave of firm closures and bad loans.
While China has expressed its intentions to reform its debt situation, internal and external market factors have forced the government to plunge more money into the market to finance economic growth and sustain the entire economy. These initiatives may diffuse the situation getting out of hand on a short-term basis. But the repercussion of a future debt crisis could be more severe. The scenario would not only be severe for China, but several other economies in the region, which are key sources of raw materials to China.
From a procurement point of view, while increasing price competition could make China still feature as an attractive proposition, buyers must consider the suppliers’ debt situation before making any decision. No one knows when, or if, the Chinese debt bubble will burst. With the situation still unclear, short-term contracts could be the way forward.