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China Crushed By Debt

China Crushed By Debt

24 May 2019
  • Recent trade war escalation showed how sensitive to adverse events are Chinese companies.
  • Over last decade, China has heavily increased its debt in order to support economic growth.
  • Chinese central bank tries to support the economy by facilitating credit access.
  • Weakening economy in China negatively affects related countries and their companies profitability.

Over the recent days, financial markets again has been dominated by the ongoing trade war between U.S. and China. However, prolonged negotiations are just one of many unsolved problems in Beijing.

Donald Trump raises tariffs on Chinese products

On Sunday, May 5, President of the United States announced on his Twitter account tariffs increase on Chinese products worth 200 billion dollars from 10% to 25%. New duties have been implemented on Friday, May 10. Trump added in his tweet feed that 25% tarrifs on additional goods worth 325 billion dollars may be also imposed in the future.

After the announcement, indices in China recorded the strongest declines since January 2016. As it can be seen in the chart below, technology companies dropped by almost 8% (blue line), while the Shanghai Composite Index, consisting of all companies listed on the Shanghai Stock Exchange, lost over 5.5% (red line).

source: zerohedge

In the U.S., at the beginning it looked similar - futures contracts on stock indexes were significantly losing, till the market opening. During the session, however, U.S. indices recovered almost all losses, closing the day slightly below zero.

source: zerohedge

During the following days, investors in the U.S. were slowly losing faith in a quick deal between U.S. and China, as a result stock prices on the American stock exchanges dropped by several percent. However, declines in the Middle Kingdom were stronger.

Why do we mention this? The above situation shows sensitivity of Chinese companies to any threats related to the ongoing trade war. For this reason, investors are very concerned about further developments in the Middle Kingdom. Continuing sell-off of Chinese shares is a very good proof of that - between 6th and 10th May foreign investors dumped stocks worth 4.4 billion yuan (646 million dollars), which was the biggest weekly sell-off in history.

China's problems, however are much greater.

Debt problem