China is in a world of difficulties attacking the economy one after the another in a row. Though demand for domestic consumption is up, resurgence of COVID-19 in many areas, including Beijing, is creating fear among people. Job losses and pay cuts are eating away the power of consumers and hence the growth trajectory of economy is on a limping mode.
CHINA, or the People’s republic of China (PRC) is the fourth largest country area wise and the largest country by population. China is one of the oldest civilisations led by numerous monarchies and presently led by the communist regime known as the Chinese Communist Party or the CCP.
Presently China is the largest economy by PPP basis and the second largest by the GDP parameter. China has come a long way since its monarchic days to the present.
Prior to the opening up of economy through reforms almost half a century ago, Chinese policies kept its economy very poor, closely controlled, stagnant, conservative & thus relatively isolated from the global economy.
Since opening up to foreign trade and investment and implementing free-market reforms in the late 70’s, China has been among the world’s fastest-growing economies, with its gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.
The astounding growth has enabled China, on average, to double its GDP almost every decade and helped millions come out of poverty. China has become the world’s largest economy (purchasing power basis), manufacturer, service provider and holder of foreign exchange reserves.
As time passed China’s GDP growth has seen a downturn from about 14.5% in 2007 to about 6.6% in 2018 and could well be about 5.5% by 2024 as per IMF.
The main drivers of China’s economy
The 3 main drivers of China’s economy are MANUFACTURING, SERVICES & AGRICULTURE. (And REAL ESTATE)
- MANUFACTURING: China just about makes “anything under the Sun” as they say. Be it Iron & steel, Aluminium, Textiles, Cement, Chemicals, Computers, Mobiles, Rail cars, Aircraft & even Toys. You name it, China has it all. China also has a very thriving Automobile manufacturing sector.
- SERVICES: Till about 2013, only the US & Japan had a big service industry. Since then China also shifted to a very productive service sector. A study done in 2010 shows the service industry amounted to 40 % of its production. From non-existent shopping malls and private retail markets in the late 70’s, to Microsoft & IBM having its presence now, China has come a long way in the service sector.
- AGRICULTURE: China has about 300 million farmers. This amounts to more than the entire population of many countries barring China, India & the US. Rice being the dominant product, China also produces Wheat, Oil seeds, Tea, Tobacco & vegetables.
- OTHERS or WIP: Huge government investments are being made into health care, information technology, high end manufacturing & alternate fuels off late.
- REAL ESTATE: Real estate in China is developed and managed by public, private, and state-owned red chip enterprises. And it is huge. The real estate sector in China grew rapidly till the 2008 financial crisis. The govt launched a series of policies including down payment increase and interest rate hikes. After the crisis hit, most of the policies were either tightened or some even eliminated.
Property analysts state that China is massively oversupplied and overvalued, and is a bubble waiting to burst with serious consequences in the future. The Growth of the housing bubble ended in late 2011 when housing prices began to fall. This deflation of the property bubble is seen as one of the primary causes for China’s declining economic growth since 2012. If the housing bubble bursts completely, China’s economy will descend into chaos, and due to huge debt, China could possibly lack the resources to sustain itself.
Was China affected by the 2008 recession?
Yes, China was hit hard by the global recession generated by the financial crisis. Export sales accounted for some 20 percent of China’s gross domestic product (GDP). It suffered a huge drop in exports, and these effects on the economy were only partially offset by China’s huge stimulus package. The G-3, which account for 46% of the external demand for China’s exports, slipped into recession due to the impact of the global financial crisis. As a result of the weakening external demand, China’s exports declined significantly since 2008. Since then, the annual growth in China’s domestic debt has been 20%, which has overreached its GDP growth.
Many experts concur that post coronavirus, the world economy will not be the same and will take at least a minimum of a year or 2 to recover. The Chinese economy, second largest in the world is also set to be completely changed, with a few experts foreseeing a permanent setback.
For some years now, China has been leading the global manufacturing through its organised supply chains, on the back of large amounts of debt. Troubles are mounting for China since its years of extravagance on borrowed money has now resulted in its debt pile becoming extremely large at a time when its economy is contracting. China’s debt has risen dramatically in the past decade, largely the result of credit fed to state-owned enterprises in the wake of the global financial crisis.
China’s raising debt, is a troubling factor
How bad is it? China’s debt is higher than the United States and lower than Japan, the world’s most indebted leading economy. As of May 2020, it stands at approximately CN¥ 39 trillion or US$ 5.48 trillion equivalent to about 48.4% of GDP. And some experts say the concern is that, China’s debt has surged at the sort of pace that usually leads to a financial bust and economic slump.
If the bubble bursts? Will China crumble under its own debt pile?
When the coronavirus pandemic hit China, many experts feared the worst. Housing sales in the country plummeted at the outset of the pandemic. Housing sales saw a fall of almost 35+ % in the first quarter of 2020 compared with a year earlier. Real estate prices have soared to the sky due to huge loss of sales. The manufacturing has slowed down drastically. China has a huge debt pile up. China has built more than it can sell. Demand is much shorter than the supply, be it in Manufacturing or in Real estate. These 2 components have contributed extensively to China’s economy. Now, these are hit very badly.
In short, China bit more than it could chew!!!
The COVID pandemic has changed the total world scenario in almost everything. The world stopped for a few months. Global economy was hit very badly. Even after about a year, things are still not normal in almost all countries. The world is stepping very tenderly & carefully.
But has China has it in them to sustain itself? Or has it overdone itself to a non bailable position? Time will tell. Let’s hope for many other hugely dependent nations’ sake & for China itself from a human perspective, it survives and re develops itself.