Ever since China has begun it’s 25 year long process of capitalism, the average GDP has grown by more than 2000%. This has brought hundreds of million of people from a state of poverty in the country. With an annual average GDP growth of 10%, the communist party saw it’s remaining in power as cemented as ever.
This summer however, the Chinese economy was struck a serious blow due to the many issues that were slowly growing over time and may be heading towards an economic collapse. With the global crisis in 2007 and again in 2010, the annual growth has been declining to somewhere around 7%. This doesn’t sound as bad when talking about a developed country like the US, but for China this could spell disaster.
To overcome this looming crisis, for the last couple of years president Xi Jinping has relaxed the restrictions when it comes to the Chinese domestic stock market. Thus many citizens were able do increase their savings in a record amount of time. There are now nearly 90 million stock traders in China, half of which have opened their account in the last year.
This has led to many trades taking place with borrowed money. To make things even worse, over 67% of all these traders don’t even have a high-school education and there aren’t simply enough qualified analysts to correctly judge the companies listed on the exchange. This massive surge of capital drastically increased the value of Chinese companies, inflating their levels.
Moreover, the state itself started cleaning its own balance sheets by selling its junk assets at drastically high prices back to its own people. In short term, this caused the market to go up even higher, becoming the second largest in the world. This eventually led to this June, when in just a couple of days the market plummeted 1400 points. More than $3 trillion were lost as the stock bubble finally burst.
The government immediately banned all share holders with more than 5% from selling their stocks and pumped hundreds of billions back into the exchange to stop the free fall. This development will most certainly keep China’s GDP growth well below 7% in the coming years. This in turn will make it extremely difficult for the communist party to convince the Chinese people that their way is the best way.
Thanks to the team at The Daily Conversation, we were able to share this recent development with you.