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 Richmans' Trade and Taxes Blog

Chinese Firms Particularly Vulnerable?
Jesse Richman, 1/15/2015

ODU Professor of International Business Shaomin Li published a piece in Fortune Magazine on the 12th which made an interesting argument about the vulnerability of Chinese firms to declining economic growth.  The title is: "Corporate Ponzi Game in China?"

They report a series of interesting findings.  

1. Many Chinese firms have relatively low profit margins. 

2. In order to grow rapidly such firms have relied upon debt financing.

3. The debt-financed growth of capacity in the absence of substantial profits makes China's economy particularly vulnerable to a slow-down in economic growth.  They note that corporate debt in China is more than 100 percent of GDP.

The growth of China's economy, based upon state subsidy, debt, and mercantilism creates vulnerabilities, perhaps particularly as the world economy remains weak, with relatively thin demand for China's goods.  

If China continues to rely upon mercantilism, it may well work to push the exchange rate versus the dollar and Euro down substantially in an effort to boost exports.  The yuan reversed its long trend of gradual appreciation versus the dollar in 2014.  Will this continue?