Challenges to the Chinese Economy
China’s economy is in a rough patch. It has seen its growth cut by the International Monetary Fund to 3% this year, the second weakest growth since the 1980s. In 2020, growth is expected to drop to 2.4%. This slump has hurt trading partners and depressed demand for imported goods. Small businesses have been devastated by repeated shutdowns and uncertainty over business conditions. Many restaurants and retailers have closed their doors.
Economic growth
Economic growth in China is dependent on investment and exports. While the latter have increased significantly in recent years, China has tended to have an excessive dependence on exports, which has impacted the country’s economic growth significantly. In 2009, China’s net export contribution to the national economy fell to a record low of -37.4%, a record low for a large economy. In contrast, the contribution of consumption increased by 23.4% over the past four years.
Since China opened up to the world in 1991, it has experienced a new cycle of urban construction. In its early stages, this resulted in the so-called housing boom, the accumulation of residents’ real estate. In the subsequent years, urbanization accelerated, fueled by expanding consumption credit and active fiscal policies. In spite of this, investment has been the primary driver of China’s economic growth.
Another factor contributing to China’s economic growth is the country’s rapid industrialization. Today, China is the world’s leader in coal, steel, cement, and chemical fertilizer production. It also ranks first in production of durable consumer goods and electric energy. China’s high-tech industries have increased rapidly in recent years, and many of its industries boast production capacities that exceed those of any other country in the world.
While the primary sector remains dominant in China’s economy, employment in the secondary sector has been falling. As a result, a large part of the nation’s economy is now devoted to manufacturing. And, the industrial sector is growing more rapidly than the secondary sector.
Investment
While state-owned enterprises (SOEs) still account for over 25% of the country’s GDP, most investment in China’s economy comes from private players and foreign investors. China’s economy depends on market conditions at home and abroad and is highly responsive to those conditions. Recent plans for China’s economy include aspirational and compulsory targets. Nonetheless, there are many challenges associated with the Chinese economy. Here are some of them.
Investment growth in China’s economy is slowing down, according to data released by the National Bureau of Statistics. Private sector fixed-asset investment rose 5.7 per cent in January-November, a smaller percentage than in the first 10 months of the year. Meanwhile, industrial output grew at 6.1 per cent, outpacing analysts’ expectations. In other words, the economy isn’t facing an economic crisis, it’s just stalling.
The government of China is actively seeking foreign direct investment and technology to modernize its economy. However, the investment climate was hit by the economic crisis in 1988-89 and political tensions following the Tiananmen Square incident in 1989. In 1992, however, the government began opening up new sectors and cities to foreign investors. This period, between 1992 and 1996, was one of the most active times for American investors to enter China’s economy.
Investment in China’s economy is a significant part of U.S. foreign trade and the country is currently the world’s second-largest recipient of FDI. By the end of 1998, cumulative FDI in China reached $267 billion, which is approximately the same as the US’s total. While many large multinationals have started operations in China, many still aren’t making money.
Consumption
Consumption in China’s economy is on the decline, with the decline of household disposable income a major driver. In part, this is due to the falling share of labor income in the economy. This is because workers are increasingly moved out of agriculture and into manufacturing, where capital commands a larger share of income. The full PS archive is available to subscribers.
But the decline of travel during the coronavirus outbreak is likely to spur consumption, as Chinese families are sending food packages to one another. Meanwhile, the Chinese leadership is committing resources to the transformation of the economy. This includes expanding the logistics infrastructure to support this growth. In January, China’s Premier Li Keqiang pressed the “enter” key in WeBank, a microfinance bank that provides loans to local truck drivers.
The rebalancing of the Chinese economy has begun. Although industrial output growth remained relatively stagnant last year, retail sale volumes rose by more than 9% year-on-year. This trend reflects the importance of consumption in China’s economy. Euromonitor International estimates that this growth should be closer to eight percent.
In recent years, China’s economy has undergone a massive transformation from a planned economy to a market economy. Beginning with the restoration of household agriculture, the transformation led to a massive expansion in the country’s economy. As a result, China is now the second largest economy in the world, with a nominal GDP of $5.87 trillion in 2010.
Debt
China’s economic recovery has prompted a renewed focus on debt management. At the end of May, outstanding total social financing, a broad measure of credit in the economy, rose 11% from a year earlier. Although China’s financial system is still largely under the control of the central government, signs of destabilisation in the financial system have given economists pause.
One of the causes of China’s rising debt levels is the rapid growth of lgfvs, or local government finance vehicles. These are often tasked with public works and land development, and act on behalf of provincial and city governments. These entities are backed by large companies, and raise billions of dollars in loans from global investors. The problem is that these investments are not included in official government budgets, and it is difficult to gauge how much risk they are taking.
Despite the recent growth in credit, China’s economy is still struggling with structural adjustments. The central bank has estimated that the total outstanding debt in China’s economy is 14.4 trillion yuan at the end of 2010. Most banks report very low non-performing loans on this debt, but a significant chunk of this debt is expected to default.
Debt in China’s economy continues to be high by international standards, with corporate debt now reaching levels far above those of advanced economies. While the rise in debt levels has supported growth in recent years, the risks associated with excessive debt accumulation pose significant risks to China’s economy. The real estate market in particular has experienced a lot of turmoil as large property developers defaulted on loans, raising financing costs in the corporate sector. As a result, real estate activity has weighed on the growth of GDP.
The impact of a coronavirus pandemic on China’s economy is likely to be modest. However, an outbreak of the disease could disrupt global value chains. This could negatively impact the economy of China and other countries around the world. It is therefore important to monitor the spread of the disease and its effects on the economy.
The COVID-19 outbreak caused a significant reduction in foreign direct investment, tourism, and business trips. The outbreak also affected direct consumer demand. This, in turn, affected the economy in several ways, including labor shortages, decreased supply chain procurement, and reduced transportation. These factors reduced demand for many goods.
China’s economic response to the COVID-19 outbreak has been relatively muted. The impact on domestic production is minimal. Nonetheless, the economy is likely to experience an overall decline in consumption and investment over the next two years. A stable domestic epidemic situation will help China mitigate the impact of a global outbreak. In 2020, the global epidemic situation is projected to fall by 14.6%. In 2021, global epidemic levels will reach a negative 5.39%.
China’s economy could see a negative impact from the COVID-19 outbreak in the first quarter. Real GDP growth will fall below 6.4%. However, the impact on investment may be less than this. If the outbreak spreads to other parts of the world, the impact on China’s economy could be greater. But the rebound effect would reduce the negative impact on GDP by 4.4% and increase investment by 0.8%. Ultimately, the impact on China’s economy will be minimal. As a result, the economy could see a positive growth rate by 2021, which is in line with World Bank and IMF projections.
Unsustainable growth model
The Chinese government has been trying to reduce the debt burden of its citizens while keeping its economic growth rates high for many years. One way to do this is by increasing the share of consumption in the economy. However, this has been an unsustainable growth model. Since 2007, Beijing has been trying to rebalance domestic demand to a higher share of consumption. Recently, the Prime Minister of China, Wen Jiabao, declared that he would make this a priority.
The problem is that China already has overcapacity in many sectors, including manufacturing. Adding more capacity will not improve growth in the medium term. It is also important to plan infrastructure development, as unplanned growth can lead to a glut of housing and roads. Moreover, China’s consumption is still below 30% of GDP.
The economy needs to rebalance, but China cannot continue on the current path of spending on nonproductive infrastructure and real estate. China’s economy needs to move away from this path and replace it with productive investment in high-tech industries. In addition, China’s population is aging and productivity is lagging.
Unsustainable growth model in China’s economy has exacerbated social inequalities in China’s society. This is due to low consumption share in the economy. As a result, Chinese households cannot afford to consume more than what they produce. The new common prosperity policies of Beijing aim to redistribute income from the rich to the middle class and the poor. Yet these new policies will only help the poor and middle class in a very marginal way.
