China Economy Growth – Some Serious Concerns
Despite the ongoing China economy growth, there are some serious concerns to be considered when analyzing the growth rates. These concerns include a growing dependence on debt, inflation and slow growth in the near future.
Economic reforms under Jiang Zemin
During the period of Economic reforms under Jiang Zemin, China’s trade and investment soared. Its export sector became dominant. Moreover, the country’s economy has become more diversified, with foreign investment taking a variety of forms. However, China still lags behind the other great powers.
The post-Jiang period is expected to bring a new approach, which is not yet firmly defined. Chinese leaders will need to decide how far they can break with the past and how much they should revisit the official line. The future of China’s economic reforms is not yet clear.
The “fourth generation” of China’s leaders will inherit two strengths and five unresolved questions. They are better positioned to move beyond the shadow of Tiananmen. However, they also have to overcome the political opposition of Jiang-era supporters. They must also decide whether they will break with the recent past and make a dramatic change.
The “fourth generation” of China’s leaders has to grapple with hard choices on the home front. They must confront the challenge of implementing an economic reform strategy that will maintain high growth rates while at the same time balancing inequality and maintaining a social safety net.
As Chinese leaders grapple with the difficult task of implementing economic reforms in the post-Jiang era, they must also confront the challenges posed by the Asian Financial Crisis and the ongoing SARS outbreak. In addition, they must address the need to open up key financial and industrial sectors to foreign competition.
In the meantime, the country’s appetite for raw materials and inputs has grown rapidly. This has a significant impact on the global commodities markets. It has also fueled the growth of a growing urban underclass in China. This new urban population largely comprises illegal migrants, who are gaining a foothold in China.
In addition, there is a growing pressure to liberalize political affairs. This pressure is largely triggered by the elites’ concerns about the legitimacy of the regime. However, analysts have also identified risks of social unrest. The post-Jiang period will not be free of challenges, including social unrest, which will require Chinese leaders to make tough choices.
Excessive reliance on surging debt
Using the debt-to-GDP ratio as a benchmark, China’s debt has increased by more than a third of its overall output over the past decade. This has been a significant economic challenge for the ruling CCP, which has sought to reduce its reliance on debt while maintaining high growth rates.
A recent report from Barclays reveals that credit growth in China could reach between 10 and 10.5% by the end of this year. This is a significant development, given that Chinese local governments borrowed to build infrastructure, and companies took out mortgages to fund their capex.
The aforementioned debt-to-GDP ratio is an indicator of China’s corporate leverage. The ratio is surprisingly high, considering that corporate debt is relatively small compared to national debt. It appears that the government’s attempt to rein in debt has backfired.
There are three main reasons why corporate leverage has increased so rapidly. First, corporate leverage is higher when corporate earnings are weak. Second, China’s corporate leverage has increased because the country’s corporate investment rate has increased dramatically. Finally, the amount of internally funded capital investment has decreased.
A broader measure of credit in the economy is total social financing. In May, China’s total social financing increased by 11.7% from a year ago. This is an indication that China has made some of its financial commitments a priority.
China’s corporate debt-to-GDP ratio has increased by a whopping 65 percentage points since the previous decade, which is quite a bit. While most of this debt is manageable, it has also been characterized as a threat to the stability of the Chinese economy.
The biggest challenge for the Chinese government is to decide whether to continue to pursue its policy of “smart growth” or adopt a more fiscally responsible approach. This will be determined by how much debt the government can afford to service, as well as the tax rate that will apply to future spending.
The country has four possible paths to achieving fiscally responsible growth. While the Chinese government has proposed a number of solutions, it is unclear which route is best.
There are many options for China, including a reformed economy, one based on high saving rates, one that is less dependent on investment, and one based on a high trade surplus. While the economy may have a hard time implementing any of these policies, it is not impossible.
Inflation is a serious concern in China
Several bouts of inflation have wreaked havoc on the Chinese economy over the past two decades. While the latest bout of consumer price inflation has been largely contained, the potential for future bouts is real. The latest bout of consumer price inflation is a warning to global investors that the Chinese economy is not immune to bouts of inflation.
Although it may be hard to quantify exactly what caused the surge in prices, a number of factors can be blamed. Disruptions to supply chains can generate inflationary pressures. Moreover, energy shortages threatened food supplies. The latest bout of consumer price inflation also reflects the continued boom in energy bills.
The Consumer Price Index rose 1.5 percent in October from a year ago. This may be the largest increase in the index in more than five months.
This may be attributed to disruptions in China’s supply chains, which has led to a spike in prices. The government has attributed the spike to increased vegetable prices, while Covid-19 restrictions also threatened food supplies.
The producer price index (PPI) rose more than 13 percent in October, the biggest jump in PPI inflation in more than a decade. The cost of coal mining and processing was a major driver, while the price of gasoline rose by more than 30 percent.
The real estate market has also been a hotbed for speculation. China’s real estate sector offers some easy-to-see signs of financial expansion.
The Chinese government has reappointed a new set of leaders to manage the economy. However, President Xi’s ability to revive growth in the near term is limited. Inflation may be the biggest challenge to China’s growth.
The Chinese government is now focusing on developing more fiscal tools to support the economy. However, given the country’s lack of a social safety net, these tools will be limited. The Chinese government will also likely rely on the old playbook of building state-bank-financed infrastructure. This will only serve to further depress China’s growth in the long run.
The Chinese government is also attempting to stimulate demand with lower interest rates. However, these measures have had little effect on business spending.
Slowing growth in 2022
Despite the Chinese government’s ambitious target of 5.5 percent growth for the entire year, the country’s economic growth will likely slow down in 2022. The PIIE estimates that the Chinese economy will grow only 3 percent in 2022, down from 8.1 percent last year.
This slowdown in the Chinese economy is causing global leaders to rethink their economic plans. China is one of the top export markets for many developing nations. As export demand to China weakens, these countries will lose their growth opportunities. China’s slowing economy also adds to global concerns about a potential recession.
Among the factors slowing China’s growth are high inflation, high interest rates, and the COVID-19 pandemic. Soaring food and energy prices are eroding real incomes and increasing living costs. These factors will affect the consumption of many consumers in advanced economies.
The Chinese government has been easing its stance on COVID-19 to stimulate consumption. But the COVID-19 pandemic is expected to continue affecting China. Moreover, President Xi has few options to revive growth in the short-term. In the meantime, China will have to deal with the spillover effects of its economic difficulties.
Another factor that is slowing the Chinese economy is the decline in property prices. Two-thirds of Chinese households’ wealth is in property. This has led to a sharp decline in consumption growth. Declining property prices further discourage households from spending.
High interest rates in the United States are increasing the pressure on capital outflows from China. The People’s Bank of China has resisted raising interest rates, but has cut its 5-year rate in recent weeks. It has also maintained its policy stance supportive of growth. However, there are still a number of policy mistakes and structural constraints that are affecting China’s growth.
One of the reasons for the slowdown in China’s economy is the large capital outflows from the country. These outflows are fueling debt. This has increased the debt vulnerabilities of many developing countries.
In addition, a wide range of internal economic problems have also hampered China’s growth. China’s largest cities have been hit hard. Shanghai fell 13.7% from last year, while Beijing’s economy shrank 2.9%.
