China’s economy is slowing down as the country moves away from a growth model driven by investment and exports toward a consumer driven growth model. Such transitions have always been tricky. After years of over investment, China is facing overcapacity and «old economy» enterprises are struggling to compete.
The government’s tendency to promote credit expansion among state-owned enterprises has also led to an accumulation of debts. These companies have loose budgetary constraints and low profitability. In short, the situations are similar to those seen during the major transitions in the former Soviet Union and many countries in Central and Eastern Europe. The question then is not whether future and potential growth will be lower. That is already a given. Rather, it’s whether growth can sink much lower than its current potential, and if the mounting debt could provoke a genuine financial crisis. It’s still too early to say for sure, but it’s clear that the situation needs to be monitored very closely given the spectacular increase in corporate debt since the financial crisis. This trend is completely unsustainable and unsound.