I. Introduction
China carries one of the largest debts in the world, close to around CHY 33 trillion (USD 5.7 trillion), to support exponential growth of industries, mainly exports and consumer markets. But considering the the implications of carrying such high debt levels, the Chinese government started asymmetrically deleveraging the national economy back in 2015-2016, clearly favouring the state-owned enterprises over the private sector companies.
However, it is not difficult to notice that China’s economy is slowing, because of both economic cyclical factors as well as longer-term structural trends. Growth is projected to decelerate to 6.1 % in 2019, and to further slow to 5.9 % in 2020 and 5.8 %in 2021.
The short-term downside risks to this forecast, includes a sharp slowdown in global trade and investment in the event of a possible re-escalation of global trade tensions; a sharper-than-expected deceleration in major economies; and a renewed spike in global policy uncertainty, which may erode investor and consumer confidence.
Whereas, an upside risk to the forecast is the possibility of a comprehensive and sustained resolution of trade tensions between the United States and China, which could dispel enduring trade policy uncertainty, boost business confidence, and support China’s trade, investment, and growth outlook.
Further, domestically, growth may suffer from the potential adverse effects of financial de-risking, with its asymmetric negative impact on private sector financing and the risk of a disorderly unwinding of excessive leverage, which may depress domestic demand.
Over the medium-term however, adverse structural factors, including slower labour force growth, minute productivity increases, and the lingering impact of excessive borrowing and environmental negligence will continue to weigh on potential growth, in the absence of deep and comprehensive reforms
II. Issues before the Dragon government
The Chinese Government faces numerous economic challenges including: (a) increasing the domestic household consumption and reducing the savings rate; (b) managing high corporate debt burden to maintain financial stability; (c) facilitating higher-wage job opportunities for the aspiring middle class, including rural migrants and college graduates, while maintaining competitiveness; (d) reducing industrial overcapacity; and (e) raising productivity growth rates through the more efficient allocation of capital and state-support for innovation.
- Economic development has been more in the coastal areas rather than the interior china, and to add to the pressure, 169.3 million migrant and their dependents have relocated to the urban areas
- China has been at the lead of damaging the environment – notably air pollution, soil erosion, and the steady fall of the water table – all of which are serious long-term problems. China continues to lose agricultural land because of erosion and urbanization
- To battle this, the Chinese Government is seeking to add energy production capacity from sources other than coal and oil, focusing on natural gas, nuclear, and clean energy development. Finally, in 2016, China ratified the Paris Agreement & committed to peak its carbon dioxide emissions between 2025 and 2030
- The challenge going forward is to find new drivers of growth while addressing the social and environmental legacies of China’s previous economic development path.
III. What is the Chinese government doing?
To say that the dragon government has not done anything for the nation’s people is a gross mis-statement. Since the economic reform in the country, from 1978 to date, a close to 800 million people have been raised out of poverty with a GDP having grown a 49-fold, which is “jaw droppingly” massive.
However, in recent years, China has renewed its support for government owned industries and enterprises in sectors considered important to “economic security”, explicitly looking to foster globally competitive industries.
Considering the political scenario in China, the leaders have surely undermined some market-oriented reforms, by reaffirming the “dominant” role of the State in the economy, which is a stance that threatens to discourage private enterprises and makes the economy less efficient.
However, the slight acceleration in economic growth in 2017— which by the way was first such uptick since 2010—gives Beijing a little more confidence to pursue its own “state” economic reforms, focusing on financial sector deleveraging and its structural reform agenda.
Consider the growth of China’s GDP over time – GDP growth is undoubtedly slowing but it is still voluminous, and the evidence of this is pretty crystal looking at the McKinsey Economy Activity Index over the last 15 years. For a teaser, know that in the year 2019, China will still add value to their GDP and consequently to the global output, the equivalent of the entire Australia’s economy
IV. Understanding the dynamic changes to China’s GDP
Just the fact that there has been a consistent decline in the labour force since 2012, has led to a slump in the manufacturing and construction output which were the second and third drivers of China’s growth until now.
However, consumer market yet remains the greatest contributor of value to the Chinese economy (close to 65-70%), with an estimated target of USD6 trillion by 2030, surpassing any other country (double the growth of Indian consumer market). But growth in consumption still seems to be on a slowdown, beneath which lies a change in the pattern of consumption, with a slowdown visible in the automobile and cosmetic sectors, among other customer centric industries, clearly indicating a change in the demography/population of the country.
Further, responsibility of the credit infusion and the current credit crunch in the economy is easily identifiable if one looks at the asset bubbles being created across the nation. The greatest and possibly the most common (globally) example of this is the rise in the real estate prices even though the consumption figures fall and the growth in the disposable per capita income of the Chinese people has drastically reduced. However, to their credit, the Chinese government has started the deleveraging the economy in 2016, after quickly recognising such factors. But these steps have led to a serious lack of availability of credit, defeating the initial intention of the government.
Now, segue into a little basic macro-economic concept, let’s look at the Cobb-Douglas formulae of production function – after removing labour and capital/credit out of the equation, what’s left: Total Factor Productivity. This is that part of the output which cannot be explained by the inputs (Labour or Capital) and usually is a result of technological innovation. This, is the recourse for China, which the nation has figured out and has been pushing for, heavily.
Note that although consumer market dominates and is expected to, in the decadent future, the dynamics of the GDP contributors is bound to change considering the changing factors of the country itself and the government’s continuous effort to deleverage and control the non-banking credit as well as the exchange rates vis-à-vis the dollar. In fact, the effects of this change have already begun, wherein 2019 the contribution of net exports has increased exponentially, and the investment and debt funded contribution to the economy has reduced by around half. This corroborates the fact that the country has been pushing for new technological innovation around production (TFP) and has been pushing for exports as a direct result of this.
V. A little about the CHY vis-à-vis USD
In July 2005 China moved to an exchange rate system that references a basket of currencies. From mid-2005 to late 2008, the Chinese Yuan (CHY) appreciated more than 20% against the US dollar, but the exchange rate remained virtually pegged to the dollar from the beginning of the global financial crisis until June 2010, when Beijing announced it would resume a gradual appreciation. From 2013 until early 2015, the CHY held steady against the dollar, but it depreciated 13% from mid-2015 until end-2016 amid strong capital outflows; in 2017 the CHY resumed appreciating against the dollar – roughly 7% from end-of-2016 to end-of-2017. However, since late 2015 the Chinese Government has strengthened capital controls and oversight of overseas investments to better manage the exchange rate and maintain financial stability.
VI. Conclusion
China has surpassed all expectation which any rational person would’ve had from a communist country with a population of over 1.6 billion people. Suffice to say, being the second largest economy of the world and taking the war to the US, takes guts. And China has shown plenty. Considering the above, it is obvious that China’s communist government has their work cut out for them. Apart from it being interesting, it is also important that we closely follow the dragon and it’s policy movements to understand that effect that it has, not only on the multi-nationals and neighboring regions, but on the over all geopolitical scenario, and the corresponding “moves” that the world undertakes to appropriately respond, to either protect their own economy (the United States) or to take advantage of the opportunities that might just show up (companies exiting from China to set up shop in India), kind of like a chess game, just on a global scale.
