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Alternative Market Briefing

Other Voices: Is China triggering a global crisis?

Tuesday, January 19, 2016

By: IMD Professor Nuno Fernandes on worldwide market turmoil

The recent steep slides on global stock markets have been a long time in the making. As early as two years ago, it was becoming obvious that in addition to the contraction of global demand, as well as the general increase in the relative competitiveness of other Asian countries, China’s rapid rise was coming to a screeching halt and leaving excessive debt in its wake.

In recent weeks, the Chinese market experienced its biggest weekly fall in 20 years, tumbling more than 15%. This volatility serves as a further warning: China is still an emerging market, and it has an immature financial system.

Excessive debt

Excessive debt is infecting every sector of China’s economy, from real estate and local governments to state-run or partially government-controlled companies.

Most large companies in China were on a roll for a number of years, in large part thanks to subsidies from the government. But, at the same time, they were not accruing capital because their activities were so dependent on subsidies. Chinese banks, which are mainly controlled by the Communist party, compounded matters by giving credit at artificially low interest rates fueling excessive debt in all of the country’s sectors.

Many of China’s largescale development projects are perfect examples of how excessive debt has piled up. Infrastructure projects, funded by subsidized loans with low interest rates, yield low profitability and we......................

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