Thursday, April 26th 2017

By: David McDonald

China is still to this day one of the fastest growing economies in the world. High demand from other countries for Chinese exports along with cheap labor helped the country to succeed in reducing their trade deficit as well as capitalize on infrastructure and financial investments. China is not able to maintain same steam as it had in the past. World Bank in its recent report predicts a gradual decline in China’s growth.

The Statement

The World Bank expects China to grow at 6.5 percent in 2017 and 6.3 percent in 2018. East Asia and Pacific Economic Update also stated that China grew at 6.7 percent in 2016.

We can see that although growth slowed drastically since 2007, the nation’s Total GDP is still on the rise, and Real GDP growth of 6.5% is not a bad mark at all, when compared to the rest of the world and global competitors like the US (2.2% growth) China’s growth of 6.5% is still among the best on the planet in terms of developed nations.

Investors were not happy with recent predictions. The numbers came out as a disappointment for the investors who had high hopes. According to the report, China is looking to rebalancing its consumption and services. Part of the slowdown is also due to slowdowns in world trade. A slowdown in global trade along with trade barriers can add more pressure.

As you can see in the diagram above, China’s growth for future years is expected to rise.

China and U.S. relations remain strained. Both countries continue to put efforts on strengthening the trade policy. China has been under attack for manipulating Yuan time and again to support its exports. Though the country has denied.

Current Situation of China’s Economy

The country is not in a prosperous condition as it is likely to hit the same GDP level which prevailed in the 1990’s. It has reduced its growth target to 6.5%. The country continues to focus on internal economic drivers instead of increasing its GDP. The country has high debt due to its policy of “easy access to credit” for boost the slowing economy. High rates of unemployment have prevented the country from sustaining its growth.

World Bank’s remark on the Chinese economy does not come as shock. The country is trying to solve some basic problems embarked by its economic policies. The country has two years to survive the roadblocks and ensures that their country is back on track. The meeting between the US and Chinese presidents is a first step (among many). The country is looking forward to rebuilding one of the biggest economies in the world.

One question that emerges from this snapshot of the economy is whether the central bank’s shift to a looser monetary policy has had much if any, effect. China has cut its benchmark interest rates three times since November and has twice lowered banks’ reserve requirements, freeing up more cash for them to lend. That might appear to be quite a dramatic loosening, but the impact in China was bound to be more muted because of the nature of the country’s monetary system. Over the past decade, the central bank relied on foreign cash inflows to generate monetary growth.

Furthermore, activity levels across China’s manufacturing sector continue to improve in 2017, continuing the solid if not spectacular performance seen in the second half of 2016.

The government’s manufacturing purchasing managers index (PMI) fell 0.1 points to 51.3, fractionally above the 51.2 level that had been expected by economists.

A PMI measures changes in activity levels across China’s manufacturing sector from one month to the next. It ranges from a score of 0 to 100, with 50 deemed neutral. Anything above 50 indicates that activity levels improved, while a reading below 50 suggests activity levels declined.

At 51.3, it suggests that conditions improved marginally across the sector in January.

This is due to increased production efficiency among Chinese manufacturers and increased capital investment in Chinese firms.

However, some economists argue that the Chinese government has a tendency to rely on infrastructure development to sustain growth in the long term, but infrastructure development is essential for economic growth.

Thus, the question is whether this investment-led model is sustainable as the authorities have trouble taking credit. We need to watch closely whether China’s top leadership will send a stronger signal to tighten monetary policy shortly.

An article from Reuters notes some important highlights of China’s Growth Model:

“Faster growth in industrial output is the primary factor in the first quarter surprise, and due mostly to higher value-added growth related to supply-side consolidation in heavy industry,” said Brian Jackson, China economist at IHS Global Insight.

Fixed asset investment rose 9.2 percent on-year, trouncing estimates, but IHS believes the growth was due entirely to faster spending in industry and construction.

Real estate investment remained robust, expanding 9.1 percent, while new construction quickened despite intensifying government measures to cool soaring home prices.

Most analysts agree the heated property market poses the single biggest risk to China’s growth, but predict the cumulative weight of property curbs will eventually temper activity, not produce an outright crash.

“Sales (growth) has started falling, which means tightening measures are starting to take effect,” said Shen Jianguang, an analyst at Mizuho Securities in Hong Kong.

More than two dozen cities announced property cooling measures in recent weeks after curbs late last year appeared to have little lasting effect.

The construction boom has helped fuel the best profits for China’s industrial firms in years, giving them more cash flow to pay down debt or invest in more efficient plants.

Buoyed by a near 12 percent increase in housing starts, China produced a record amount of steel in March, Reuters data showed. But analysts say warning signs are flashing.

Rising inventories and recent falls in steel prices suggest output is growing faster than China’s demand, raising worries of a glut later in the year, which could heighten trade tensions with the U.S. and other major trading partners.

INCOME GROWTH PICKS UP

There were also positive signs on the consumer front.

After slowing for five quarters, disposable income growth picked up to 7.0 percent, the fastest since late 2015.

Retail sales rebounded 10.9 percent on-year as consumers shelled out more for appliances and furniture for new homes.

Auto sales also showed signs of recovering after weakening early in the year after the government reduced subsidies.

Analysts are closely watching for signs that consumption is accounting for a greater share of China’s economy, which would

make growth more broad-based but also reduce the need for more debt-fueled stimulus and reliance on “smokestack” industries.

Another bright spot was a further rebound in private investment, which had cooled in recent years, leaving the government to bear more of the burden of supporting the economy.

Private investment growth accelerated to 7.7 percent.

We can conclude from a brief analysis of China’s economy that it is indeed growing, and is functioning in what I believe to be a highly sustainable manner.

Although their government does tend to rely a little heavily on foreign investment and infrastructure projects, I don’t see this as being detrimental to their future economic growth because China’s middle class is slowly growing, which will transfer over to a greater demand for these infrastructure projects and labor as well.

Overall, population and business incomes are rising, manufacturing production is becoming more efficient and is steadily rising, and on top of this, China will sustain Real GDP growth of 6.5% in coming years, which is 4.3% greater than America.

The future looks bright for China.