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I am no expert, but my rough understanding is that China has 'trapped' itself in a tricky situation by relying on its export economy and on debt/investments to stimulate growth. Ideally, a 'healthy' economy is balanced between exports, local consumption, and debt/investment. But China has weak local consumption due to their high saving rates and their capital outflows. This means they have had to rely on the other two (debt, exports) to grow the economy. High debt normally isn't an issue because a healthy economy can always 'grow out of it' (i.e. over time inflation will make it more manageable). But because China is export driven, if their currency rises too much, that part of their economy will crash (because their exports get more expensive). Had they had more local consumption, the impact would be smaller because the stronger currency would mean increased buying power for local consumers. But because local consumption is weak, they have to hope that growth in exports outpaces growth in debt (which recently hasn't been the case).

The big question mark, is how actively the government will intervene if things go south. In a normal market, too much debt results in bankruptcies. This results in people losing money (all of those savers who have been socking their money away in banks). But a lot of institutions in China are state owned, so it's possible that they could prop up these institutions. No one really knows what that would look like, or how it would impact the economy, but the assumption is you will have a lot of zombie companies that only exist because the government is making good on their debt obligations.

Thank you for sharing, especially your concerns centered around government intervention in case things go south.

From my understanding, capital outflows seek higher returns in foreign markets which would eventually (in theory) be repatriated to drive eventual consumption. If the Yuan is strengthened, would this not make foreign produced goods cheaper to consume within the country? Would it truly be a "crash" if goods are consumed domestically instead of shipped to foreign countries? Considering the high savings rate, could these accelerated savings be used to purchase productive foreign assets?

Strange times, to say the least.

My understanding from what I've read is that the capital outflows aren't just seeking higher returns in foreign markets. Instead, they are also seeking to protect that money from an expected economic collapse in China and lord knows what means of trying to claw that capital back by the government.

So I'm not sure a strengthening Yuan would necessarily remove the need for that reduction of risk.

That is my understanding as well. These aren't your typical international investments, the goal is to get the money out of China entirely.

Worth noting, China is also trying to limit international investments (in addition to capital flight mentioned above) to try and encourage domestic investments[1]. If I had to pick one sign that there might be trouble ahead, it would be this one. It's one thing to try and clamp down on people dodging capital controls, but it's another thing entirely to try and limit international investments that would broaden China's economic footprint.

And one final thought. While there are some troubling signs, no major modern economy is or has been as tightly controlled as China's. So I don't think anyone really knows how this will play out. It's quite possible that they thread the needle and keep everything rolling smoothly. And as others mentioned in this thread, there are plenty of examples in history where massive infrastructure investments caused some big financial pain/failures in the short term, only to result in positive long term impacts. It's quite possible that China is playing the long game here, ready to suffer some short term pain, but looking 20-30 years down the road. As their economy matures, infrastructure projects will get more expensive (see the US for example), so might as well overbuild now.

[1] https://www.theguardian.com/business/2016/dec/26/china-to-re...

That's actually a really good question. But think about what it would mean for any one single individual to be able to answer you. How could they possibly know? And I don't mean how could the _possibly_ know, I mean _how_ could they possibly know. What would you have to learn, assimilate, and understand before you could be reasonably expected to be able to answer your question? Granted, I could reply like this to any highly complex question but as so many macro-economic questions reduce to this position from what you're asking I think it's justified.

Personally, I haven't a clue. What I see is this though. People keep predicting that China's growth is going to hit a wall. But China keeps posting figures (if you can believe them) that point to the inevitable fact that that nation will be by far the largest economy in about a decade. What happens then is anybody's guess. My _feeling_ is that there will be a swing of political power that trails economic power. What we have to figure out is whether this political transition happens relatively peacefully or not. That's the _real_ question I think.

As far as I can see, political transition is not a problem in near term. The situation is actually better after Arab Spring.

Like all developed economies, China is in a complex state with both good and bad things going for it. The good things for China are very good, the bad things are very bad. How things shake out will depend more on how the Chinese react to things than on the inherent levels of goodness/badness that exist in the Chinese economy today. They have the capacity to overcome their problems, but will they?

If you are interested, buy a ticket to china. see and feel by yourself.

most of western media are negative about China.

PS: I am Chinese and live in US.

Right, I mean I've visited China half a dozen times now, for a total period of probably half a year or more, and half of my family is now Chinese. But I can't answer any of those questions, and neither can any of my family members (except for one rich uncle who won't talk about that sort of thing). I don't think visiting China is going to help answer these questions.

The total extent of economic policy discussion that I've been able to solicit from Chinese friends & family is thus:

1. Save lots of cash 2. Buy lots of apartments

And that's it.

This comment is a bit concerning considering what's going on in the housing markets of Vancouver, Seattle, Toronto, and the Bay Area.

Not sure what to tell you, other than I look forward to reflecting on these comments sometime in the next 2-3 years.

Ignoring people's nationalistic/racial biases for a moment, a contradiction is somewhat normal with some economic events. Imagine there is a real estate bubble in some country. We'd expect articles painting a hugely positive picture of growth, and also negative articles about debt and surplus housing. Both sets of articles are valid, if perhaps cherry picking facts. Journalists like to spin things to be more sensationalized.

I think that all of these are true, and not necessarily contradictory?

1. The Chinese _economy_ has a trade surplus

2. Chinese _people_ have a high personal savings rates

3. The Chinese _government_ has a lot of debt.

4. Chinese companies and firms are trying to diversify their investments by investing outside of the country. Especially when the government is mostly good but has potential for being capricious and totalitarian.

FWIW, NYT is always shining negative lights on China related articles.