China stocks: The real reason why the Chinese stock market has gone haywire

But the problem is much bigger than the stock market

China's stock market has tanked in the last month, losing 30 per cent of its value (Reuters)

The Chinese stock market has tanked in the last month, losing 30 per cent of its value. That’s over $3 trillion in losses – a third of China’s GDP and ten times the debt of Greece.

But the problem is much bigger than just the stock market.

1. The Chinese economy is slowing down

This year China cut its growth target to 7 per cent, its lowest expansion for more than two decades. But then it would be nearly impossible for the country to keep growing at 10 per cent as it has done for almost three decades.

2. China keeps spending its money on building things

China’s economy is focussed on investment, rather than consumption, exports or government spending. Eventually, it will run out of things to invest in. There was so much investment in China’s property market, for example, that many houses stand empty and growth has stalled – there’s even a risk property investors might start to lose money.

(EPA)

3. But the Chinese government should make it easier for people to buy things

Some economists think China must shift its economy away from investment towards consumption. It could help that along by letting young people who migrate from rural areas to work in the cities move to the cities, where they could spend their money and start businesses. With extra money in their pockets, Chinese consumers could start to spend.

4. China has a huge amount of debt

Just like poorer families in China that borrowed to invest in the stock market, businesses and the Chinese government have borrowed money to invest in infrastructure and property. If growth stalls, may find it very hard to pay off those debts.

(Reuters)

5. A one party system could stifle innovation

If everything is directed from above, it will be difficult for China’s middle-earners – the people most likely to spearhead a production economy by creating businesses at home – to be truly innovative. The one-party state is unlikely to change, but there might be a loosening of governance allowing more private enterprise.