by Taylor J. Kovar – CEO/Founder, Kovar Wealth Management
–Hi Taylor – I’m reading about problems with China’s economy. Do you know what those are and what they mean for us?
–Hey Miles – There are a lot of different factors in play over there. Some of them will ripple through the global economy to an extent, other issues might make room for the US and other countries to step in and provide a missing supply or service. It’s complicated, but here’s a layman’s breakdown.
- Real estate. There’s been a developing real estate crisis in China for about two years. First, a real estate juggernaut called Evergrande defaulted on debts that funded a massive number of housing units that Chinese workers had already paid for and were expecting to live in. That kicked off the crisis, and more recently another developer and a trust company have both missed interest payments. People aren’t getting the homes they bought, jobs are being lost, and it isn’t looking like there’s a quick or easy solution to the problem.
- Supply issues. Everyone was a little surprised to see how quickly China recovered in the wake of the pandemic, and now it’s looking like they roared out of the gate too quickly. Trade issues have caught up with Chinese industry and the yen recently dropped to its lowest level in nearly two decades. As other countries have gotten back on track, China has seen a big drop in exports. When an economy cools off too quickly, it becomes really hard to figure out international trade deals and how, when, and where to move existing products. That stuff is complicated enough and becomes extra confusing when things take an unexpected turn for the worse.
- International effect. China’s economy is enormous, so it’s always worth monitoring what’s going on over there. If giant Chinese firms can’t pay debts, that means companies here and elsewhere aren’t getting the money they’re owed. Nevertheless, our economy isn’t expressly dependent on theirs. The real estate problem over there might be felt lightly outside of China, but not to a major extent. Depending on how bad China’s exporting woes get, it might make room for other countries to create new commercial relationships and experience a little bit of growth.
I’m very interested to see how the housing crisis plays out over there. Most Americans remember how real estate and banking problems can cause an economic disaster in a hurry, and China seems to be flirting with that kind of problem. Stay informed on it, but there’s no reason to panic right now. Thanks for the question, Miles!
