Last year, China overtook the US as the world’s largest economic powers measured by PPP — Purchasing Power Parity. This may have received little attention, as most people focus on GDP — Gross Domestic Product — where the US still has a commanding lead, but since PPP measures the relative value of different currencies, this is a significant metric.
As a result, this places China at the centre of the global economy as any economic decline in China will send ripples around the world. As one of the biggest consumers of natural resource, the success of many global economies depends on the success of China and its need for natural resources.
And this decline may be coming. As per this recent article over on Business Spectator that asked what can we expect from China in 2014, not only has the country lost some of its lustre as of late, but this tarnish on the silver has not escaped the watchful eye of the World Bank, whose chief Economist went on record last month stating that the global economy is running on a single engine … the American one. This does not make for a rosy outlook for the world.
So why the loss of lustre after almost three decades of growth? Simply put, with rapid growth in an economy comes rapid growth in the growing pains associated with rapid growth, which typically include burgeoning local and national government(s) (as cities, provinces, and federal overseers struggle to keep up with growth), excess industrial capacity (once the tipping point where there is enough capacity to meet demand is reached), and a stagnant real estate sector (once the majority of the market that can afford their own homes have them). China has all of these problems. But that’s not the reason that China is loosing its lustre, as many other countries, including the US, have these problems. The real reason is shadow banking.
There is a significant amount of local government and corporate debt in China as these local governments and corporations have borrowed heavily from both the banking and shadow banking sectors to finance their growth. How significant? Standard & Poor’s estimates that total outstanding corporate debt in China was around $14.2 Trillion US at the end of 2013, compared to $13.1 Trillion US debt held by American corporations at the same time. And while exact numbers are not known, local government debt has increased an average of 20% over the last three years and the total government debt level in China is estimated as about 54% of China’s GDP — and that’s just the official debt. The real debt level could be higher when you consider shadow banking and private lenders.
Now, this is a lot of debt, but as the level of government debt is not yet at the level of US national debt or UK national debt which exceeds GDP, it’s not alarming — yet. But it’s enough to cause the World Bank and International Monetary Fund to think twice about China’s rating and if China decides that it’s time to reign in and get the debt under control and significantly curbs spending across the board, a lot of economies that are currently being boosted by China’s spending spree are going to take a big hit.
This will be good and bad news for your Supply Management activities, depending upon where you are in the supply chain. If a company loses a major China supplier, the power shifts back to the buyer and there will be good deals to be negotiated. However, if you lose a major China client and your demand declines, so does your bargaining power and the power shifts back to the supply base. And then there’s the currency hedging to think about. Is the expected drop in currency exchange good or bad for you? (For more about this issue, refer back to our currency damnation post.)