Wakeup call for China

China

China remains a big contributor to the world economy, but it’s no longer the high-flier it once was.

And its addiction to debt-fueled growth since the 2008 crisis has started to gain unflattering attention.

This week Moody’s Investors Service lowered China’s sovereign credit rating for the first time in nearly three decades.

 

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Downgrade

The credit agency sees a toxic mix of lower growth and higher debt levels.

China’s economy has downshifted from the double-digit growth levels it enjoyed earlier in the decade.

 

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China can no longer afford debt-fueled, infrastructure spending to keep the economy in high gear.

In a recent speech before the National People’s Congress, Premier Li Keqiang set a new blueprint for the Chinese economy that sees growth in the 6% to 7% range.

 

Debt Mountain

China’s total government, private sector and household debt is now slightly above US levels and approaching that of the Eurozone.

 

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What has some analysts worried is the explosion of private debt, which is elevated by international levels.

 

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Takeaway

China’s growth story since the late 1970s represents one of the great success stories in economic history.

Yet all good things come to an end, in my opinion.

China is still growing at impressive rates, but I think it will spend years getting its debt down to more manageable levels.

And that will be a drag on growth for a still developing economy in my view.

Photo Credit: hans-johnson via Flickr Creative Commons