Improve or Fail: China’s Volatile Economy

China’s economy is thriving but growth has slowed, yet growth rates are still higher than the majority of Western nations. The large population enables China to create powerful economic output. Electronics manufacturing, plastic manufacturing, agriculture and services have traditionally been major industries driving China’s economy. However, the transitioning economic environment is seeing a shift towards a heavier service reliant than present.

The traditional industries will not go away, but they will need to adapt. Contract manufacturing is losing focus on low cost goods to more specialized ones. Services are starting to become a more key area, and agriculture still employs over 300 million workers. These core areas will continue to be vital to China’s economy but embracing new emerging industries will be key to propelling further growth.


Emerging Industries Fueling China’s Economy

Attention has started to focus on industries that utilize knowledge, innovation, technology and intricate design. Currently one industry that holds great potential is aerospace engineering. Presently, only a fraction of China’s electronics manufacturing output comes from aerospace. Though the government has identified aerospace as a high priority, hoping to make it a global player.

Energy is another vital sector that should see further growth across China. The ability of the country should not be understated. Recent news emerged announcing a partnership between the French and Chinese to finance a British power plant. The Chinese investment is in the form through CGN, an already established manufacturing company in the domestic market. Clean energy is creating new opportunities. Air pollution is a major problem in certain cities such as Beijing. Reducing pollution and improving air quality should become a target for the government, and many companies may look to benefit.

Over the course of the last few years, education has become a crucial government priority. A transitioning economy includes a skilled workforce. Education will be fundamental in delivering this transition as smoothly as possible. Private universities are emerging, creating an option for companies to invest in their employees directly. The government has also committed to providing $250billion to the sector every year.

The ageing population has become a problem for China. Resulting in the healthcare industry becoming an interesting market. Healthcare will receive an investment of 7% of the nation’s GDP by the government. The available funds will go towards constructing urban hospitals and rural health centres. Private healthcare should also see a boom of sorts. A multi-billion-pound industry exists in private healthcare within the UK despite a tax funded NHS being freely accessible by all citizens. Though in China, healthcare isn’t completely free, creating a much greater opportunity for private companies to profit.

Only a few emerging industries were covered above but many more exist such as the always-relevant custom manufacturing. Snippets were highlighted to display the sheer diversity where potential waits. Select industries such as custom manufacturing and healthcare are already well-established, but future trends are expected to fuel even further growth. Amidst the transitioning period of China’s economy, the uncertainty is creating plenty of excitement for new innovative industries to emerge.


Negative Developments Pulling Down China’s Economy

Back in 2014, China’s big banks pressed the PBOC to cut reserve-requirement ratio based on increasing pressure for high profitability. The discussion between the big banks and the central bank demonstrated Beijing was facing a weakening economy with slowing growth. Therefore, cutting reserve-requirement ratio is unavoidable since the deposit reserve rate is one of the methods to control inflation in China.

Lianping, a chief economist, suggested that “the PBOC should reduce the ratio to an “appropriate” level to help banks and support the economy.” However, cutting reserve-requirement ratio might have a negative influence on the financial stability when the stock market becomes better.

Again, a couple of months ago, PBOC again lowered down the required reserve ratio for lenders by a point. This movie was viewed by many people as a financial cleanup, but it is actually China’s move to support domestic economy and at the same time counter Trump’s administration which constantly pressures China on trade and other aspects of it. Lowering down the RRR will also put downward pressure on the yuan.


China’s Finance Ministry Dealing with Debt

A few years back, the finance ministry faced an issue when Premier Li Keqiang stepped up curbs on local borrowings just as LGFVs (local government financing vehicles) prepare to repay 558.7 billion yuan ($89.8 billion) of bonds this year amid economic growth that’s set for the slowest pace in more than two decades. In addition, debt counted as local government debt will get definitive government support.

Therefore, in order to deal with the debt issue, firstly, China’s provinces must submit their reports classifying all local borrowings within their borders including those of LGFVs as either government debt or not by today. Secondly, the government should cut reliance on LGFVs. Thirdly, the government will impose stricter controls on new local government borrowings. All these processes took a long time to be implemented but the economy already took a big hit.


China’s Long-Term Approach in Central Asia

As China and Russia begin to move closer in terms of mutual trade and economic support, a related issue is the development of trade between China and Russia’s neighbors along its western border. In addition, Russia has started to develop its infrastructure in the China-Russia development axis.

This means Chinese influence on Russia’s neighboring states will start to have an impact upon future Russian trade. It also means China will influence how the region develops up against the borders of the expanding European Union.

Furthermore, Armenian trade with China has reached historic highs, attaining some US$355 million in 2013. In the meantime, China is also involved in a variety of different energy and electronics manufacturing projects in Armenia and is interested in participating in the building of a railway that would link Armenia with the Iranian ports on the Persian Gulf.

Therefore, roads and railway network will assist China go to the major Asian trade routes.


What Does Brexit Mean for China?

After the surprising referendum result where UK citizens voted to leave the EU, many questions are starting to be asked. The news was immediately met with crashing markets, including the FTSE 250 dropped by 10% and the pound weakening and falling to its lowest point against the dollar in 30 years. While these consequences have appeared in the short term, mainly due to the reactionary nature of the financial markets, questions about the future economy of the UK and how Britain will perform on the international stage in the future remain.

However, many believe a new opportunity has risen out of this decision, and it involves the opening of China’s and UK’s market to each other. The e-commerce behemoth JD.com believes the UK’s exit from the EU to be a positive outcome for China. Tony Qiu, the head of JD Worldwide said, “For ecommerce business plans there will be an immediate impact because the product pricing will be lower as the pound falls in price”.

After launching their new store focusing on importing British brands manufacturing designs, a growing market has been created by Chinese citizens whose rising disposable income has resulted in a demand for these imported manufacturing designs as items to sell online.

While it seems in the present fallout of the result, China has seen a positive short-term impact, the long-term outlook has not been so clear. Previous years has seen the relationship between the UK and China strengthen. This connection between the two nations was deemed to be a “golden relationship”, with China particularly seeing advantages in having an ally within the EU who will sing their praises. Nevertheless, due to the recent news, it appears this relationship is now on the rocks, and China may find their chances of successfully negotiating market economy status with the EU much harder to achieve. China might want to look for a new close European partner.

With China’s economy being heavily reliant on custom manufacturing exports, the EU represents a favorable market to access. However, the Brexit could damage the nation’s custom manufacturing sector, who will find it harder to get favorable conditions when exporting to the EU if it must consider several different national standards rather than one European. While the UK may themselves negotiate an appealing set of conditions to China, the size of the market is much smaller, with the EU representing 28 different countries currently.

Too many different standards might hurt, even if they are intended to be more favorable, and there is always the thread that they will be less favorable in other countries following Britain’s example.

There is still further uncertainty even about the immediate future. The UKs prime minister, David Cameron, who was a driving force behind developing a strong link between the two nations, has announced he will stand down as leader in the autumn. With a new leader coming in, and a refreshed team working beneath them, experts are unsure of whether the UK will look to double-down on their relationship with China or cut back due to working closely with the USA.

From China’s perspective, the nation was heavily in favor of the UK staying within the EU, with President Xi Jinping releasing a statement in October 2015 saying “China hopes to see a prosperous Europe and a united EU, and hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties”.


Summary

The questions that remain in China’s eyes are more focused on global stability, rather than maintaining the relationship of each country they are dealing with. It is a total effort but not a conscious effort on US relations, siding with Britain or getting more deals with the Armenians and find more foreign custom manufacturing investors. The main goal is to gain stability despite all the major disruptions that have shaken their economy and their strong custom manufacturing industry remains a big factor. As soon as China can achieve the stability they want along with continuous growth, they will become a major player in the global economy. A name much bigger than their population currently say.

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