The People’s Republic of China has the world’s fastest growing economy in the world. It started booming the fastest in 2000’s. A lot of insight was needed to foresee its downfall back in 2008 after the Leh Man Brother’s crisis. The global crisis had caused reduction in retail sales, industrial productions and exports in China. But China, apparently started to grow again only to commence its fall in 2010, which continued till its stock market began to go downhill this July resulting in the worst fall in Chinese shares in the past 8 years. Economic growth is slowing faster than anticipated. Considering the big-picture look, this emergency will definitely won’t mark the end of China’s glorious future but a lot many repercussions needs to be taken care of before China takes a leap of faith. Here are a few facts about the hybrid-like Chinese economy and its imminent downfall.
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  • It didn’t happen overnight!
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    From the past 20 years, the Communist Party has established social stability in China by promising its people a “Chinese dream” of achieving economic growth and power. All this happened but at the cost of huge debt and a lot of cheap money offered by state-owned banks. Estimations show that the debt might be amounting to a hundred and eighty percent of the country’s GDP now.
  • Reducing restriction on the domestic market further aggravated the problem
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    In the past couple of years, Xi for the first time, relaxed its domestic stock markets in order to encourage its citizens to invest. As a result, the middle-class grabbed the opportunity of making good money out of their savings and started investing. The market is packed with 90 million stock traders now, with almost half joining in just the last year alone.
  • A lot of less educated and not-so-qualified investors (67%)

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    Elimination and relaxation of regulations and promising astronomical profits encouraged the people of China to invest without much knowledge of the listed companies on the stock market exchange. A lot many stocks were purchased with borrowed money by wealthy investors and even by people holding less than a high-school education (67% of the total investors).
  • The consequent massive economic bubble
    china-bubbleThe market bubble had started to develop with the 2008 stimulus programs. One of it being the elephantine $586 billion economic stimulus program for rebuilding earthquake-stricken buildings, developing infrastructure, roads, highways etc. This ‘freshly-created’ money boosted employment and raw material demands and showed an apparent economic growth. The newly created money caused existing money to lose its status resulting in inflation. Moreover, in the recent rat-race of unregulated market activity the stock market bubble started to grow at an enormous speed.
  • Ludicrous optimism compounded the dangers
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    The Chinese have put out billboard ads announcing the Renminbi as the new world currency.
    The Chinese have put out billboard ads announcing the Renminbi as the new world currency.

    In order to assert its leadership in the economic world, China always wanted Renminbi to have a sway equal to that of the Dollar in the global market and economy. Its restrictions and strictures to protect itself from global economic forces has been its pillar of support. In the blind need of maintaining Yuan as a pre-eminent currency, so as to strengthen the country’s centrality to the global economy, the Chinese government invigorated investors to keep putting in money in the surging market.

  • Shanghai Index Plunged this June from 5,100 to 37,00 wiping out more than $3 trillion

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    renminbi dollar exchange rate
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    In Beijing’s efforts to stabilize the matter, Chinese currency was devalued by almost 2% the last month against the Dollar to boost its export competitiveness. For a currency like Renminbi, which has a strict and narrow trading band, such a slip was uncalled for. The government is now pumping hundreds of thousands of dollars back in the market to stop the rapid slumping. Shareholders with huge stakes in the firms listed on the exchange are banned from selling for the next six months. In order to bring the Shanghai stock market back up, the Government is trying all measures possible.

For a country like China, with such huge population the number of investors are relatively small. Also, the market size is incomparable to Western Standards. Hence, there won’t be a total collapse any sooner. Nevertheless, when this Frankenstein-like sell-off is over, the investors would have lost all their confidence in the market perpetuating the GDP growth of The People’s Republic of China till and below 7%.