New York, NY USA - Steve Picarillo, Principal at Creative Advisory Group, Inc comments of China's economy.
To revitalization China's slumping economic growth, which reached an 18-month low of 7.4% in the first quarter of 2014, the government said it would cut taxes on small firms and speed up the construction of railway lines across the country. Further, last month, China's central bank said it would cut the amount of cash banks needs to keep in reserve for banks engaged in lending to agriculture-related businesses and small companies, to make more cash available for lending.
"While economic growth has returned, albeit barely, China’s economy is clearly not out of the woods, concerns are mounting" Steve Picarillo said. "Indeed, debt outstanding is massive, as historically the economy was fueled by credit, and reducing reserves at banks introduces trepidation as to the ability to absorb losses from the overheated property markets. Leverage and doubt is not a good combination."
"Additionally, and likely more importantly, oversupply in the real estate markets is a significant concern in China," Picarillo continued. Property construction has been growing at an unsustainable rate, however demand has diminished, leaving developers with an increasing level of inventory of unsold property. This leaves the potential of a gaping hole in the economy as the real estate sector and related services is estimated to be about 20% of GDP, and property investment alone accounted for more than 15% of economic growth last year.
Historically, an overheated real estate market, overbuilding, high leverage and inadequate bank reserves have triggered many economic calamities across the globe, Ireland comes to mind. History suggests that a housing shock could ripple out to the broader economy, especially the banking sector, which provides financing to developers. In addition, real estate is closely tied to the manufacturing and services sectors. "All we need to do is to look back at the sovereign credit crisis, in Ireland, Spain, Portugal and even to US, to see that the property markets are not likely headed for a soft landing," Steve Picarillo added.
For additional information on Steve, please visit his website at www.stevepicarillo.com.
The opinions in this article are the views/opinions of the author and Creative Advisory Group, Inc. (CAG), based on public information and the author’s experience. This is not a recommendation to buy, sell or trade any security, debt or any other financial instrument. The author and CAG do not hold any interest in any of entities mentioned in this posting, and have no plans of entering into any financial trade in the same in the next 72 hours.
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