Chinese Economy: Saturation and Beyond
The Chinese economy has grown about 6.9% in 2017, going ahead of the annual target set by the administration, making it a $12.40 trillion economy by nominal value. However, 45% of this GDP growth was due to public investment and 10% through government expenditure, which again involves investment. So, approximately half of China’s GDP is made up of investment. The good thing about this investment is that it creates jobs for the country. But pumping money in to sectors which are already over-capacitated, such as steel, can lead to very dangerous times for China in the near future. The problem is that there has to be enough demand for goods in order for industry to merit investment. And there has been an evident fall in the demand for consumption of Chinese goods due to the fall of the middle class in the west, post 2008.
China’s investment-led growth story could predictably be a crisis-in-waiting. Much like Japan, which has undergone stagnation for over a decade, China’s growth trajectory could be marred by non-performing assets, a bloated asset price bubble, and, most importantly, external forces like competition in global markets that are outside of Chinese control. According to the popular Chinese economist, Andy Xie, China’s need at this hour is “supply-side reforms”. Chinese policy-makers need to move away from an investment-driven economy and towards a consumption-driven one.
Interestingly, China’s statistics show that the government has been able to create more than 13 million jobs annually for the last five years, even after the economic slowdown in 2015. This is due to the current government’s pro-employment policies towards the public in state-owned enterprises—where the risk as well as the investment is extremely high, but the potential for returns is not very bright at this point. The government needs to take a back seat and let the market economy function. Yet the power of government is unquestionable in China. China's current president, Mr. Xi Jinping, has extended his term indefinitely. And it is hard to believe that the he will let privatization and liberalisation of these state-owned enterprises take place in spite of it being as utmost need for China.
Also, this policy of massive investment has led the rise of inequality in the country. This coupled with high taxes in the country in order to generate investment has created the biggest drawback for the country. The rich in China don’t want to purchase the lower quality goods from their country and end-up purchasing from foreign companies. While the general public lacks the money to boost domestic consumption. Needless to say, the manufacturing enterprises rely on the exports to generate revenue for themselves. If foreign demand falls, the entire system comes crashing down.
According to Liang Meng, this is where the One Belt One Road(OBOR) strategy comes in play. Since, China has excess of certain capacities of basic industries and manpower in the country. It wants to export these goods to the world by building infrastructure to potentially support its current value chains permanently. This could prove to be a new way to increase employment and production. Although OBOR is politically-motivated and with a doubtful chance of success―according to Fitch Ratings, a credit-rating agency. Moreover, this foreign infrastructure strategy doesn’t stop the problem for the economy. What China needs is “quality” growth, which it is not getting right now. The country, according to economists, needs to invest in healthcare and education whilst cutting-down its investment overall by a 20% margin.
Another one of the major problems with the economy is high expectations on the part of private businesses—which are riding on the wave of government spending on capital. The corporate debt in China is extremely high at this moment as the businesses feel that they will make profits in the end. If that does not happen, the government would have to deleverage the debt. However, the biggest obstacle in the way of this is that the credit system is very brittle due to the widespread distribution of debt over the economy. Further, deleveraging the corporate debt would require prices to fall further, which would definitely lead to a backlash for the government, making this difficult to carry-out. But if China doesn’t step in to take appropriate action and further secure its weak credit system then the financial system will continue to erode.
China, as of now, needs a balanced economy and for that they need to dis-invest. Both the private and public sectors of the economy have used investment to energise the economy. But this aspect of China's growth model is, maybe, becoming obsolete. The Chinese government needs to stop interfering in the market with capital spending, to let the market take its own course, and to reduce atrocious public/private debt levels so as to repair its financial system. A positive global outlook may expand demand for Chinese goods in the short term. However, in the long term, countries would expand their own manufacturing to demand less from China regardless of a possibly failing OBOR—and China must understand that, lest it invests itself to a crash.