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China's Great Wall Is Crumbling Again: Don't Rely on China to Prop Up the World

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China has 60 million empty apartments

The world's economic recession has breached the great wall of China again. In 2008, China had a $600 billion stimulus program. On June 7, 2012, another domino fell when China had to cut its interest rate by a quarter of a percentage point in another effort to stimulate its growth again. China is desperately attempting to shift from an export economy to a consumer economy due to the world-wide recession because it is now in a slow-down of its own. The current weakening is likely to worsen. This means that the teetering economies of the United States and Europe cannot depend on China to boost them up. In fact, a slowdown in China could actually accelerate the effects of the recession on the West due to today's pervasive global economy. Not only does our economy affect China but China's economy affects ours. The interest rate cut was the first cut since December 2008. According to Tom Orlik, of the Wall Street Journal:

"A move to lower the cost of capital might support short-term growth, but it comes with a price. Higher lending will push up China's burgeoning ratio of credit-to-gross-domestic-product, building up debts that will one day have to be repaid. And higher investment spending threatens to tip China's economy further off balance, with attendant problems of waste and overcapacity."

Per Gordon Chang of Forbes, once you add in "hidden liabilities, China's debt-to-GDP ratio at the end of last year increased to somewhere between 90-160%. By comparison, at the end of last year, the debt-to-GDP ratio for Italy and Greece were 137% and 179%, respectively. Many areas of the Chinese economy are weak. New bank loans for 2012 are projected to be about 15% less than the government's goal, according to Bloomberg News. There reportedly has been a lack of demand due to shaky profits and excess capacity. In addition, though a real estate bust is not projected, Chinese real estate prices have been falling in value.

According to China Daily, China's house prices fell to a 16-month low in May, investment growth in property development experienced its eighth year-on-year decrease in April and the real estate confidence index was at its lowest level in nearly three years.

According to Alex Finkelstein of the World Property Channel, property developers in China are currently selling their inventory at a 40-50% discount and large residential projects have resulted in an estimated 60 million unoccupied apartments.

Nick Edwards of Reuters reported, "China is recognizing that they have to keep their economy stimulated and growing," said Gordon Charlop, a managing director at Rosenblatt Securities in New York. "They will be proactive to make sure they don't run into any of the problems we've faced and are facing and Europe is facing." According to Edwards, "Beijing wants to see growth solidly underpinned before a once-a-decade leadership change at the top of the ruling Communist Party, due towards the end of this year. But it is likely to be wary of setting off a fresh round of price hikes that could put social stability at risk."

Instead of being the strong economy holding the global economic system together, China may be another cause of instability, risk and uncertainty. Though China is on the other side of the globe, its economy may have a profound effect on us locally.

Our business projections should recognize the risks inherent from being a part of the global economy and we should be developing contingency plans now to be prepared properly in case of another downturn. Our economy is likely to get even more difficult before getting better.