By Jeffrey Fung '17
In the past, China has been excessively reliant on exports for its economic growth as low wages in China translated into low domestic consumption levels. This problem was exacerbated by the recent global financial crisis, the Eurozone’s debt crisis, and the erratic global economic recovery which have caused a severe weakening of the global demand for China’s exports, visibly demonstrating the flaws in an economy so reliant on the conditions of other nations.
Today, China’s GDP growth has dipped to around 7%. The country’s leaders are determined to accept a “New Normal” and accept the slowdown as the necessary cost of rebalancing the economy and shifting China’s growth to rely more on private enterprise and domestic consumption. In China, consumption as a share of GDP has begun to increase to around 50% but is still well away from that of an established economy such as that of the US – which is around 70%. As such, there is substantial room for improvement in this regard through monetary stimulus to encourage spending and stop China from going into an undesirable state of deflation.
There are more concerns ahead for China as well. Though their reliance on manufacturing has been declining, China’s factories still need to perform well in order for China’s economy to function. Worryingly, China’s manufacturing sector has struggled to grow in the past year as demand from outside nations remains weak due to uncertain global economic conditions. With the Purchasing Managers’ Index at 50.1 in April, the manufacturing sector is very close to a contraction which could prove costly to the economy in its attempts to soften the decline in GDP growth.
With problems of factory overcapacity, a property market slump, and bad debts, a vital solution may be to provide lending for more specific and restrictive purposes. Instead of lending to state-owned enterprises that simply refinance their old debt, governments are now starting to realize the benefits of lending to small and medium enterprises, who actually generate employment and create new investments. By creating new private banks for this specific purpose, China can reduce the problem of overcapacity and poorly used loans.
While China looks to rebuild its economy from an internal standpoint, it is constantly looking for new opportunities to establish its global influence, which it feels it has deserved. There are many examples of such a goal. Initiatives including opening up its markets, economy, and currency have been the first vital step to achieving China’s target. The internationalization of RMB currency has been in motion, but has still got a long way to go. China has been encouraging the use of RMB in trade settlements as well as increasing the amount of offshore RMB markets as they realize the plentiful demand around the world. Additionally, initiatives such as the QFII, Shanghai-Hong Kong Stock Connect Program, and the Shanghai Free Trade Zone provide easier and quicker paths to China’s economy than ever before. Other initiatives include China’s recent investment in Pakistan to create a Chinese-Pakistan Economic Corridor, or the new “Silk Road” to connect Asia, the Middle East, and Europe. This would not only provide greater access to worldwide markets, but would also provide many Chinese companies with employment opportunities to build infrastructure in Pakistan. Lastly, one of China’s most ambitious moves recently has been the Asian Infrastructure Investment Bank. The institution, which rivals the IMF, World Bank, and Asian Development Bank, has been seen by some as a political move by China to exert its economic power, capital, and influence. While this may be true, it will also provide huge benefits for developing Asian economies that are looking to improve their infrastructure since the IMF, World Bank, and ADB combined will still not provide the necessary capital to make a sizeable and complete impact in such nations.
While China is certainly going through a rough patch, one can expect China to resiliently bounce back. Its huge economic, social, and political impact on a global scale will have even its most hated enemies cheering China on, as a sustained, weak Chinese economy can lead to huge ramifications for every single nation in the world.
Sources:http://www.reuters.com/article/2015/05/01/us-china-economy-inflation-idUSKBN0NM2ZL20150501http://thediplomat.com/2015/04/chinas-aiib-the-final-tally/https://www.moodys.com/research/Moodys-Securitization-can-help-fund-Chinese-SME-lenders-and-internet--PR_323875