Global downturn effecting China?

The economic downturn is described as a recession and this means that real domestic product growth is negative for two or more consecutive quarters. The effects of the credit crunch has seen many emerging countries like Brazil and Russia suffer big capital outflows. In addition, the effects are more prevalent in the United Kingdom, with the government recently injecting £20 billion into RBS as its share price fell to an all time low of 63p per share. This means that the UK taxpayer is shedding out £1360 every year but more significantly 46% of RBS is owned by the state. These astonishing figures suggest a bleak outlook for the United Kingdom but how has it effected China.

China has become the engine of the global economy accounting for 1/3 of global GDP and there are signs that the global downturn has effected China but to what extent? Export volumes have slowed markedly; the growth of industrial production dropped to a six-year low in the 12 months to August; car sales fell by 6% in the same period. In addition, property sales in big cities have shrunk by around 50% over the past year. In Shenzhen prices of new luxury apartments have fallen by up to 40%.

However, large losses in the property market are better managed by Chinese banks than those in the USA since Chinese banks' loans amount to only 65 percent of their deposits, compared with far higher ratios in America and Western Europe. Moreover, In America it was easy to get a mortgage for 100 percent or more of the value of a home, but Chinese buyers must put down a minimum deposit of 20-30 percent, depending on the home's size, and as much as 40 percent on second homes. This provides banks with a large buffer as prices fall. Loans to property developers are riskier and banks' profits will be hurt as developers go bust. But according to Wang Tao, an economist at UBS, these loans account for only 7 percent of total bank lending.

Chinese consumer spending actually strengthened this summer, with retail sales rising by 17 percent in real terms in the year to August. The government also has room for maneuver. Inflation, which had been its main concern, fell to 4.9 percent in the year to August from 8.7 percent in February.

China has ample room for a stimulus because it boasts the healthiest fiscal position of any big economy. According to Stephen Green, an economist at Standard Chartered, it has a budget surplus of 2 percent of GDP, if measured in the same way as in rich economies, and public-sector debt is a mere 16 percent of GDP.

In conclusion, the global downturn has effected China in terms of its export and properties market. Although, the extent is not so great compared to the United Kingdom and other countries since its banking infrastructure has prohibited the extensive use of loans. This in turn has enabled the Chinese government to weather the global downturn and mitigate the effects of the global downturn.