The State of China20/04/17
China has been a powerhouse of economic growth in the past decade, with its construction and infrastructure booms leading to the high demand for Australian resources that many believe aided our economy through the Global Financial Crisis. However, nothing can grow forever, and China is now starting to see some cracks in their economy, spurred by the struggling economies of many neighboring countries and indeed, most countries across the world.
Chinese President Xi Jingping is in the final year of his presidential term now, and will certainly have his work cut out for him in steering the Chinese economy through their upcoming struggles.
China has set a target economic growth rate of over 6% for the next five years, lofty goals even for an economy so large. Core to the problem is the rapidly rising debt within the Chinese economy – much of their boom was funded not with cash but with various debt instruments, leading to rapid, but ultimately unsustainable growth.
The growth has been maintained by Chinese government policies which have been issuing cheap credit to Chinese corporations, thus ensuring export growth, infrastructure and unfortunately, rising debt. In many recent cases, the cheap credit issued has been used for non-productive investments or has been lost to corruption, resulting in high levels of debt with minimal payoff in terms of GDP growth and reliable, income generating infrastructure.
The problem they are now facing is this; if they raise the cost of credit, many of these corporations may struggle to pay down their debt. However, if they keep it at a low cost, they run the risk of having more unproductive debt and companies operating inefficiently, thus leading to an eventual stagnation and decline in their economy. Regardless of the options they choose to solve these issues, the Chinese economy is poised to slow down or even decline until the issue is resolved. Some have suggested that, if it is not addressed rapidly and appropriately, the debt will grow into a much larger problem that could have broader economic consequences worldwide.
Due to China’s dominance in the global market, any change to their economy tends to ripple into all economies, so it is important that China addresses this issue now, rather than later. A fix for their economic woes suggests that the country should change from a hard, growth focused model that is ultimately unsustainable into a more internally focused model that aims to improve accountability and remove corruption and lessen the negative environmental impact the Chinese growth has had on their nation.
In addition to their widespread economic problems they could face in the future, China has become an area of growing social inequality and unrest. With a fairly authoritarian social policy and a stark lack of worker’s rights, inequality and inequity in China is a massive ongoing problem and has only been getting worse on their journey for economic growth. Without a political shift to help stifle the rising inequality, social instability is likely to worsen in China.
It is difficult to say with any certainty where China is heading and how Xi will change the state’s political and economic ideologies over the coming year, but we can certainly expect some degree of changes if they don’t want to face stagnation, or worse, in the future.
For those further interested in reading about the state of China, I highly recommend reading this IMF Working Paper.