BIPP: New norms for the Chinese economy

Yiwei Wang, Contributing Writer

The Chinese economy has experienced one of its fastest growth periods in the past decade. With GDP growth peaking at 14.2 percent in 2007, China has continued to reshape its economy with fast economic development; it is currently ranked as the world’s second largest economy after the United States. Despite a slower growth rate than in 2007, the Chinese economy continues to grow at a relatively fast and stable rate, around 7 percent since 2007. Three factors have contributed to its steady growth and concurrently cause the market to be volatile: heavy lending, strong exports and strong government spending.

After the 2008 global economic crisis, the People’s Bank of China (PBC) pursued easy money policies, which resulted in heavy lending to banks across the nation to fuel the economy. The economy has grown by 6.8 percent from July to September, compared to a year ago. However, heavy lending also creates a looming debt if not managed carefully. In other words, with more accumulating debt, a country will have less effective purchasing and borrowing power. Therefore, keeping a balanced, proportional debt ratio is indispensable.

“While recent policies to contain financial risks have slowed the pace of debt accumulation, China has yet to achieve stabilizing debt ratios, and is farther still from outright deleveraging,” Director of Asia Sovereigns at Fitch Ratings, Andrew Fennel, said.

Strong exports also fuel the Chinese economy, and demand for Chinese goods remains high. However, it is important to take note of Chinese currency appreciation and the rise of Chinese labor costs when predicting future trends. Currency appreciation will cost foreign countries more to buy Chinese goods, but will also attract foreign investment.

“China’s international economic blueprint for better regional infrastructure – a stronger yuan is also in its best interest to promote a global currency and attract more investment,” Stephen Innes, senior trader at Oanda Asia Pacific, said.

Government spending is critical to the economy’s growth. From 2010 to 2015, the Chinese government has spent around 13 percent of the GDP, which showed in its upward economic trend. In general, robust government spending fuels economic growth. Take housing for example: building properties such as residence compounds and shopping malls increases market goods and service consumption. However, government overspending poses more risks than benefits to the market. Overspending not only causes inefficiency and waste, but also hurts business due to hyper-competition in the industry.

“Business is tough. The economy overall is bad and many industries are facing overcapacity issues, which filters through and impacts all industries,” Vivi Wan, general manager at apparel manufacturer Hangzhou Meisai Clothing Co., Ltd., said. “Consumers’ spending power is falling and competition is intense.”

The Chinese economy is still growing, but at a slower pace. The “new norm,” as it is called by Chinese President Xi, shows the party’s determination to have a tighter grip on the market and to more meticulously scrutinize the government’s spending and borrowing strategies.

(Visited 159 times, 1 visits today)