In China, while state-owned enterprises dominate the monopoly industries like petroleum and telecom, the country’s private economy is still the major source for growth in production, employment and exports. Private companies are very sensitive to market changes: When profit margins shrink, they will jump out quickly. Expectations are low while the Chinese economy is under the ‘New Normal’, but the government is still concerned about private investment stagnation. The top economic agency has created a work team to look into the problem and made 60 proposals to solve the slow-down issue. But will top-down methods work?
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.
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.
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.
China’s boom times are over. With global investor sentiment slipping, concerns are rising about spillover effects of a faltering Chinese economy on global markets and institutions. Although the facts of the problem are well known, fixing it is another issue—the reach and pace of fundamental economic policy choices have been subject to debate. In September 2015, Willem Buiter, Chief Economist at Citigroup, and his team published a research note stating that it was likely that the global economy would soon slip into recession, caused by sluggish growth in emerging markets, especially China. In this interview, Buiter assesses Chinese economic growth and the potential for global recession.
China’s industrial economy did not stabilize: it declined in the first quarter of 2016, according to the latest CKGSB survey of over 2,000 industrial firms nationwide. The survey, led by CKGSB Professor of Finance Gan Jie, shows that overcapacity and weak demand remain biggest challenges for China’s industrial economy. The Business Sentiment Index, a major indicator of the survey, stood at 46 in Q1 2016, a one point increase from Q4 2015, 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.
In previous years as provincial-level GDP data rolled in, China’s top leaders and provincial officials could take a certain satisfaction from the bountiful increases in wealth displayed therein. But were they to spend a bit more time with the data, such pleasure would likely lead to a state of confusion, if not consternation—the sums, quite literally, don’t add up. The total of provincial-level GDP has outstripped the national figure year after year, a problem that has only gotten worse over time. Consequently there has been a rise in the number of indicators that purport to give a true reflection of the situation.
Asia is seeing growing rivalries—and also the enduring influence of the US. In the post-war years it was perhaps easy to take for granted the deep and vast sway held by the US in Asia—from its significant role in the Asian Development Bank to its closeness to regional powerhouse Japan. China’s recent rise has reconfigured the terms of politics, economics and trade in Asia—and the world. That has informed the US’s much-discussed ‘pivot’ to Asia, a key plank of which has been the Trans Pacific Partnership (TPP). Are China’s prospects in trade and regional influence hampered because it is not a signatory of the TPP?
The days of double-digit growth in China are long gone now. And as China shifts to a new economic model, the term ‘the New Normal’ is often used to describe this supposedly more sustainable economic growth. The consensus is that the New Normal will usher in a steadier, stronger, more sustainable economy led by consumption and services. But when you break it down to a granular level, what does the term really mean? More importantly, what does the New Normal mean for the level of economic growth being pursued in China? What implications does it have for rebalancing the economy and different industries?
Dating back to 1953, China’s system of Five-Year Plans has long been dismissed as anachronistic, but it remains crucial to guidance of the economy. Five-Year Plans occupy a central place in China’s complex system of governance. For just as China’s economy has reformed and adapted in the last 37 years, so too has the planning framework. There are clear signs that planning will remain an indispensable component of Chinese economic and political development for years to come.