Saturday, February 8, 2014

China's Economy in 3 Parts

http://www.economist.com/news/finance-and-economics/21594999-some-chinese-economic-indicators-are-moving-right-direction-others-are


This article explores China's economy in three different areas. Economist believe that some Chinese economic indicators are moving in right direction where others are not. China’s economy grew by 7.7% in 2013 but a widely observed index of manufacturing published by the bank HSBC fell for the fourth straight month. To completely understand China’s economy today, it would be helpful to think of it in 3 parts. Three forms of growth to consider are supply, demand and credit. For the long run, China’s economy might depend on its workforce size and productivity.

China’s urban workforce, the main driver that produces much of the country’s output, is experiencing slow growth. A shrinking age group for this sector is posing future problems. The population of working age is declining by millions. This current demographic shift has contributed to a de-acceleration in China’s potential growth rate.

The Chinese economy depends on a second form of growth: that of demand. Too little spending on goods and services will cause problems in the underemployment of even a shrinking population. Other problems arise in inflation. Demand in China is still modest, enough to increase GDP. However, the economy failed to expand fast enough to generate any inflationary pressure. Consumer prices rose fairly slowly while prices paid to producers fell for the 22nd month in a row.

The growth in credit for China is the main concern for economists. The stock of outstanding financing for the private sector grew by about 20% last year but now some of these loans are turning ugly. One credit product, sold exclusively through ICBC, China’s biggest bank, is poised to default at the end of this month. It raised 3 billion yuan (over $490 million) for Zhenfu Energy group, an ill-fated coal-mining venture, the vice-chairman of which was arrested for taking deposits without a license. Zhenfu cannot repay its debts. The big question that remains is whether the product’s buyers, sellers or issuers will bear the loss.

Some argue that China’s credit is not all this bad and even the bad lending is not all bad. The same believe that credit can be divided into 3 categories, according to how it is spent. Some is spent on new capital and infrastructure, increasing the economy’s productive capacity. Other chunks of credit are spent wastefully, either on consumption or useless projects with struggling markets. These loans add nothing to the economy’s productive capacity, but does however add to demand. The third kind of credit is spent speculatively, on existing assets, in an attempt to increase their value. This third kind of credit adds little to growth.

Many argue that this problem should be offset by stronger exports and consumer spending, both of which have plenty of room for improvement. China’s dependence on investment remains a worry.

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