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What China's Record Debt Load Means to U.S. Retail

Posted by Nadine Miller on March 30, 2017

Worldwide, debt has taken center stage as an economic indicator. After the Global Financial Crisis of 2008, precipitated by out-of-control debt and shadow banking transactions, debt is more than just one way to assess financial health—it is at the top of the list. This year, China's debt load reached a whopping high of 237 percent of its GDP. As a point of comparison, in 2015 the U.S. went up to just over 104 percent of GDP. From a country that has historically maintained a low debt load, this sudden increase is worrisome and is likely a warning sign of financial woes to come.

China's Debt Exploded in a Single Quarter

What makes China's debt worrisome is the rapidity of the growth. Over the course of two months, China's debt load increase by nearly 1 trillion yuan. Nearly all of that came from shadow banking. Essentially, banks make loans to other financial institutions, creating cash flow—but not assets—to back up that risk.

What Will This Mean for the U.S.?

As the largest debt holder for the U.S., China's increased debt load presents some major concerns. If their liquidity suffers, the U.S. may need to find new customers for treasury bonds. In a world economy beset by financial woes, this could result in major market contractions. A slower market could cause a hike in interest rates, making it more difficult for the U.S. to service existing debt, particularly at a time when the country's debt load is predicted to increase due to increasing obligations to social security.

Effects on Fashion and eCommerce

China-textile-factory.jpgProposed tariffs could be a major problem for the fashion industry. Much of the world's fashion products come out of Chinese factories. Even top brands, like Cole Haan, Gucci, and Prada, use Chinese manufacturers. Other high-end brands use Chinese factories for part of the production process and assemble the final product in-house. As the world's leading textile manufacturer, a slowdown in the Chinese markets could indicate a massive contraction of the market worldwide.

That will impact both brick-and-mortar retailers and e-commerce sites. More debt means less liquidity and more risk. Brands have already been focused on tightening cost controls in response to shrinking markets, and political confusion has not helped to stabilize markets. Major changes, like Brexit, a possible Frexit and the recent economic crisis in Greece, add to the picture.

Will the Chinese Economy Collapse? Probably Not

The sudden rise in debt is worrisome, but it may not be the harbinger that so many economists claim. By relaxing the reigns on debt, China may be able to slow down an impending recession. Also, by leveraging that debt to invest in infrastructure, China may weather the coming storm in a better position than the U.S. after the GFC. After all, when the bubble burst in the U.S., all that was left was some very expensive pieces of paper. Plus, most Chinese debt is internal, giving the government control over how to address the problem.

A slow and controlled contraction, even when offset by large amounts of debt, may be the best way to approach a slowdown in global consumption. This will give other markets an opportunity to adjust to growth changes and find alternative avenues for growth. The fashion industry has moved toward more meaningful stories and social enterprise, helping to boost brand value beyond the cost of clothes. As the Chinese market contracts, manufacturing costs may decrease, leading to increased opportunity for smart and adaptable brands.

 

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Topics: Economics, Economy, manufacturing, trade, China, textile, Debt

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