Must-read: Why contraction is in the cards for China and Japan

Market Realist

Will a credit crunch lead to a slowdown in China? (Part 1 of 9)

Why August 13 marked contraction for both China and Japan

August 13, 2014, marked a day of contraction for the world’s second- and third-largest economies. The government of Shinzo Abe, Japan’s prime minister, announced a 6.8% contraction in its second quarter real gross domestic product (or GDP). Meanwhile, the National Bureau of Statistics (or NBS) in China revealed data showing that the growth in the nation’s monthly credit had contracted by 86% in the month of July.

While Japan’s GDP contraction was largely attributed to the rise in the consumption tax from 5% to 8% in April this year, there were other macroeconomic reasons that caused lending in China to decline from $320 billion in June to $44.3 billion in July. You can read more about the GDP contraction in Japan in the Market Realist series  Japan’s decrease in GDP shows the importance of consumer spending .

The credit crunch in China

In this series, we’ll help you understand what caused the credit crunch in China, how it could impact growth in China, and how the markets have reacted. We’ll also discuss how asset quality is a rising concern among Chinese banks along with the role of shadow banking.

On August 13, 2014, the National Bureau of Statistics (or NBS) in China revealed that credit in the country was down from $320 billion in June to $44.3 billion in July. The news caused exchange-traded funds (or ETFs) in the U.S. investing in Chinese equity—like the iShares China Large-Cap (FXI), the iShares MSCI China (MCHI), and the SPDR S&P China (GXC)—to take a dip. However, Chinese stocks—like those of e-Commerce China Dandang (DANG) and Internet search provider Baidu (BIDU)—gained some points.

July’s lending figures mark the slowest pace in Chinese lending since the 2008 bankruptcy of Lehman Brothers and the start of the global financial crisis. Plus, China’s state-sponsored export-driven economy has also significantly lost in terms of the exports-to-GDP ratio. This ratio was down to 26% in 2013, compared to 39% in 2008. The fall was due to exports being constrained by weak demand in Europe.

A fall in lending and exports in the world’s second-largest economy is sure to have global implications. Read more about the current state of China’s economy in the next part of this series.

Continue to Part 2

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