The Chinese economy faces some serious problems, including a slowing GDP growth, environmental degradation and financial disequilibrium. According to Larry Summers, former Treasury Secretary in the Clinton administration, there are some specific solutions, such as making sure that opportunities for children are the same regardless of where in China and to whom they are born, making sure that the success of enterprises depends on the quality of what they sell and taxes are collected in a fair way and, finally, making sure that those who lead enterprises and communities do so for the benefit of their stakeholders.
Over the past 25 years, China has become the world’s preeminent manufacturer, churning out everything from running shoes to Apple products. Powering that ascent was heavy foreign direct investment combined with a seemingly inexhaustible pool of cheap labor. But now, as the Chinese economy slows, wages rise and the workforce atrophies, the decades-long manufacturing boom may be ending. To help deliver China from industrial decline, the Chinese leadership is betting on automation. However for Beijing to become the world’s robotic leader, there is an even more complex issue behind updating robotic technology: how to handle the displacement of large numbers of Chinese workers?
One day in October, 2015, a group of disgruntled investors gathered in Beijing to lodge a complaint: they had bought so-called wealth management products from a state-owned guarantor backed company that managed nearly $8 billion in assets, and which had collapsed later. Such defaults have been uncommon in China’s wealth management product space, but the now-gargantuan industry may pose a large risk to China’s financial system. Many risky aspects of the wealth management products industry make people worry about the possibility of a chain reaction similar to the 2008 financial crisis, when the US mortgage market buckled under similar strains.
Optimism for Chinese firms is increasing. As they’re making money, they also face different issues. The CKGSB Business Conditions Index posted a mark of 60.8 in November, up from October’s 58.5. This shows that for the survey’s sample firms, of which the majority is relatively successful in China, the next six months are viewed with increased optimism. The CKGSB BCI comprises four sub-indices. Of these, corporate sales fell slightly from 75.4 to 74.0, while corporate profits rose from 57.4 to 61.8. The fact that both of these indices are both well above the confidence threshold of 50 shows that company prospects are improving.
Over 120 million Chinese went abroad and spent over $104.5 billion in 2015 and more are projected for 2016. But for young Chinese people, their spending isn’t all about shopping in tax-free shops. As Leo Lin Song, chief of staff of TripAdvisor says, Chinese travelers are becoming more sophisticated: they’re reaching to further places and want to have more distinct cultural experience and not afraid to explore the unknown. Yet compared to western travelers, Chinese tourists are still special. They like to read pictures and need clear guidance—and that’s where TripAdvisor chips in.
China has achieved almost miraculous advancement in a mere 30 years, but at the same time is beset with a host of structural problems and contradictions that it must grapple with, especially as economic growth begins to slow. In this interview, Kroeber, the author of China’s Economy: What Everyone Needs to Know, a comprehensive introduction to China’s rise from an economic backwater in the early 1980s to the world’s second-largest economy, offers his analysis to CKGSB Knowledge on how China got here, where it might be headed, and how to understand the changes and implications.
Central banking is not enough. While monetary policy did much to recover from the global financial crisis, its instruments have been largely exhausted and rendered ineffective. Low interest rates and quantitative easing may have kept the engine spinning, but are not pillars of sustainable economic policy. In China, there might still be scope for more monetary easing, but Mohamed El-Erian, chief economic advisor at financial services group Allianz and formerly at the helm of investment firm PIMCO, warns that, ‘‘China needs to avoid the trap that the advanced countries have fallen into, namely that of excessive prolonged reliance on central banks.’’
China’s corporate debt is rising fast, and is estimated to be between 145% and 170% of GDP, which is “very high by any measure,” according to the IMF. In most countries this would herald a wave of bankruptcies and be considered a lead indicator for an imminent correction. But in China, analysts are not so sure because the government has a high level of control and a low tolerance for slow growth. People also believe there will not be an imminent financial crisis because the government is the ultimate underwriter.
China’s industrial economy remains at the bottom of an L-shaped economic trend, according to the latest CKGSB survey of over 2,000 industrial firms nationwide. The survey, led by CKGSB Professor Gan Jie, shows that overcapacity and weak demand remain the biggest challenges for China’s industrial economy. The Business Sentiment Index, a major indicator of the survey, stood at 46 in Q2 2016, the same with last quarter, but still indicative of contraction. The BSI is the simple average of three diffusion indices including current operating conditions, expected change in operating conditions and investment timing.
Everyone in the world is concerned about how the Chinese economy is faring and understandably so. China’s linkages with the world mean that the health of the Chinese economy has a bearing on other economies as well. The CKGSB Business Conditions Index, based on a survey conducted each month, gauges business sentiment about the macro-economic environment among successful Chinese business executives. BCI registered 54.5 in August, slightly less than July’s 56.3. Corporate sales and inventory levels rose slightly.