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.
China’s economy is facing many problems that are cyclical and also structural. Some economists believe China reached the Lewis Turning Point six years ago, where the growth benefits of rural-to-urban migration dried up and wage costs started to escalate. The growth of the Chinese economy relied very much on its cheap labor—a competitive advantage that has been exhausted. Simply put, “China has come to the end of the period of easy gains in GDP.” It faces two possible paths ahead: the hard road of structural reform and painful consolidation, and the easy road of fiscal and monetary stimulus leading inevitably to further problems along the way.
The Chinese currency’s sharp fall last August has put the spotlight on the country’s foreign exchange reserves that have been dropping, increasing the risk of capital outflows. The falling reserves are not only a result of China’s transition from investment and export-led growth to rising domestic consumption, but also a reflection of the-slower-than-expected economic growth. Meanwhile, more and more wealthy Chinese are moving their assets abroad amid a lackluster domestic environment and the anti-graft crackdown. This is significant for the Chinese economy because the falling forex reserves have led to monetary policy restrictions. What can be possibly done to stabilize capital flows?
The world’s largest restaurant chain is gearing up to do even more in China. In a bid to make China its second-largest market globally, fast food company McDonald’s is set to open 1,250 new outlets in China over the next five years. Despite recent troubles over food safety in China, McDonald’s continues to be gung ho about its prospects in the country. Even concerns over a slowing economy aren’t dampening is spirits. McDonald’s is betting on population growth and rising urbanization to give sales a boost. In this edition of China Data, we bring you the latest numbers from China: from Ronald McDonald’s China plans to wind power and pork prices in the country.
The Summer 2016 issue of CKGSB Knowledge is out! It has articles and interviews like: COVER STORY: Wanted: A Miracle: Buffeted by economic forces, does China still have the wherewithal to face strong winds? CHINA DATA: From stats on wind power to McDonald’s restaurant openings, the numbers you need to know SNAPSHOT: Out to the world: More Chinese students are studying […]