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What's going on?
Data released on Monday indicated that the Chinese economy (the worlds second largest!) is showing the first signs of a mild slowdown that, some say, is likely to continue through the rest of the year
What does this mean?
Recently, Chinese authorities have been ramping up their attempt to reduce the amount of risky debt (i.e. loans that might not be able to be paid back in full) in the Chinese economy by effectively making it more expensive for banks to lend.
A big part of Chinas economy runs on borrowed cash, however, and if companies in China are borrowing less money that means that theyre probably not generating as much economic activity (e.g. by foregoing hiring someone to build a house, whose wages would then be used to buy, say, a phone). Data released on Monday suggests that the clamp down on lending is passing into the economy: retail sales and industrial activity in June both grew by less than expected, while spending on buildings and infrastructure declined in June compared to the month prior.
Why should I care?
The bigger picture: A mild slowdown this year could actually promote sustainable economic growth in China.
Ever since the 2008 financial crisis, the Chinese economy has been particularly reliant on borrowed cash to propel its economy. When another financial crunch comes around, itll likely be very difficult for Chinese companies to borrow new cash in order to pay their old debts increasing the chances of a default on these debts and a worsened economic slowdown. While fixing this problem might somewhat slow down the Chinese economy, the measures will probably benefit the country much more in the long run.
For markets: Companies might feel the pinch from more expensive lending.
Chinas economy has grown by more than expected this year, which has been good news for companies that do a lot of business there! However, a big risk for them is how Chinas tougher rules on lending will reverberate through the economy (i.e. it might impact construction-focused projects more than other sectors).
Originally posted as part of the Finimize daily email.
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