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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