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Mountain-high levels of debt are continuing to increase despite an overall decline in GDP growth. The majority of this debt is owned by state-owned enterprises, making the situation more complex. Debt can be misunderstood, as personal debt is usually an undesirable choice. However, for large manufacturing companies, high borrowing can be beneficial if the company can use the investment to generate income and this is exactly how China approached their debt situation.
Most of the money China is in debt to are headed for public infrastructure which will eventually help China’s economical growth in the future. All these projects are designed to help China improve and keep up with its growing population including be in the race when it comes to nations with the most technologically advanced infrastructures and development. However, these investments are still all raw and the fruits could be enjoyed by the country in a few years or maybe a decade later.
Still, a large slice of China’s debt problem is categorized as “risky”, meaning that if the economy starts to falter, defaults may become common. Countless times we have seen the impact on economies when debts are unrecoverable. The financial crisis saw many banks on the brink after sub-prime loans collapsed and house values did not cover the outstanding mortgage amount. China’s debt problem is serious, and one that the government is trying to address. Although the government is trying to manage the issue, it is still not under control.
Chinese Economic Threats
Worldwide political unrest is another factor that may cause concern. Understanding the level of influence this may have on China’s economy is hard. Certain economists believe political changes such as Brexit may open up opportunities for China. An independent UK may become a stronger partner to China and help the country’s economy. Alternatively, the UK leaving the EU may make it harder for China to access the EU market.
US President Donald Trump’s administration signals greater disruption in the US and China trade relationship. Events occurring in politics often catch the world by surprise. No one truly knows how political changes will affect the ever-more-interlinked global economies. With many countries already having a frosty relationship with China, the threat of economic disruption resulting from politics is possible. Further barriers to trade could be implemented, seeking to discourage cheap manufacturing design Chinese exports.
China’s economy is heavily reliant on its custom manufacturing industry and export. Even though the country has been transitioning towards a service-based economy, an abrupt decline in custom manufacturing would still be damaging. Worldwide politics is a Chinese economic threat that has a high-risk factor, but that is difficult to manage.
Another of the possible Chinese economic threats comes in the form of other countries. Asia is continuing to see rising lean manufacturing levels. Traditionally, China has been able to compete on price. However, many alternative Asian countries can now beat China when it comes to just in time manufacturing value. This may not concern China too much, as the country wants to move away from being a low-cost lean manufacturing nation. However, if the transitioning economy hits turbulence, a rise in the number of competitors would start to cause concern.
State Investment Projects to Improve the Country Economy-Wise
To get a clearer grasp on how China spent the money they owed. Here is a short list of the investment projects directly/indirectly spent for by China to help the country’s economical state. These projects are envisioned for long-term solutions which will help the country for a very long time.
1. China to Southern Europe by Rail
The Yiwu-Madrid freight route is the seventh rail road connecting China to Europe and runs from Yiwu, through Xinjiang in Northwest China, Kazakhstan, Russia, Belarus, Poland, Germany and France.
Other existing rail routes already connect China to Germany, but this new railway includes Spain and France and only takes 21 days; moreover, it is cheaper than air and faster than sea.
The rail is mainly being used for Chinese exports to Europe but will soon be used for exports to China as interest from plastic manufacturers, electronics manufacturers and chemical producers from the West has peaked.
2. The Nicaraguan Canal
Back in December 22, 2014, Chinese business, Wang Jing Company, spent 50 billion USD on establishing the Nicaragua canal in Southern Nicaraguan town of Rivas. The first investment of the project is valued near 1 billion RMB. The length of the canal will be 280 km it provided over 50,000 jobs during the construction period and 200,000 jobs in operation. Nicaragua is expected to handle nearly 5% of all global ocean shipments.
3. China’s High-Speed Rail between China and Thailand
3 years ago, two locomotives arrived in Thailand, replacing the diesel locomotives from the United States. These two locomotives were among 20 locomotives purchased from China by Thailand’s railway agency.
Premier Li Keqiang said that if China’s advanced equipment can be exported, it will make full use of spare production capacity while helping China upgrade its equipment. Therefore, both China and Thailand hope that both sides implement the preliminary railway project-related work for this project, in order to lay a good foundation to start manufacturing design as soon as possible.
In addition, the long-distance railway in Thailand helped promote the construction of the Trans-Indochina railway which will promote trade and develop logistics channels between the 2 countries.
4. Yiwu-London Rail Line
The Yiwu-London rail line is the 2nd longest freight route in the world. The Chinese government set out a strategy aiming to boost links between Europe and China and this rail line supports the strategy. Targeting the former Silk Road route, this direct freight train have London become the 15th European city to become connected.
Many advantages have materialized to international exporters and manufacturing companies from China. The journey this service makes is cheaper than air freight and faster than sea freight. Providing a cost-effective alternative to these traditional methods which is why the freight train service become extremely popular.
Advantages result from the route the service takes. Originally starting in Yiwu, China, the service passes through Kazakhstan, Russia, Belarus, Poland, German, Belgium, France and finally London. Ultimately, it has created a strong infrastructure link between China and Europe. Other benefits include a potential economic boost in the contrasting slowing custom manufacturing climate.
5. Xi’An-Chengdu High Speed Train
The Chengdu high-speed line connects Xian, the Wei River Valley, Hanzhong, the Han River Valley, Guangyuan, Jiangyou and Chengdu in the Sichuan Basin. Tin Mountain tunnel is the longest double-track tunnel across the whole of the Chinese high-speed network. In total, the track spans almost 16km. This industrial design is a clear testament of the Chinese government’s dedication to bring their infrastructure up to first world standards.
6. Baltic Pearl Project
The Baltic Pearl Project is the largest investment project by Chinese firms initiated outside the country. Mainly backed by the Shanghai Industrial Investment Company, using funds raised by the Shanghai municipal government, the project is sheer in size and has a hi-tech industrial design.
Situated just outside St Petersburg, Russia’s second largest city. The Baltic Pearl Project houses 35000 residents including shopping centres and public buildings. In figures, this will be 14000 apartments and over 600,000 square meters of real estate. Russian residents are the beneficiary of this Chinese infrastructure project. However, China has still benefited greatly from financing the project, and it highlights the international reach of Chinese companies.
Many other industrial design and infrastructure projects are currently taking place within China. The Tianhuangping hydroelectric project will be supply large amounts of power to eastern China. The Kashgar-Hotan Railway will connect cities and towns in the Basim Tasin region. Other projects include the recently completed Qinling Tunnel, stretching for 11 miles underneath Zhongnan mountain.
China’s 5 Year Renewable Energy Plan
The infamous rise of China is a prime example of a country becoming industrialized. Manufacturing companies were popping up at tremendous rates. As with any developing country seeing extreme growth, environmental concerns were pushed to the side. Smog and high pollution levels often follow as a result. China is no outlier, and international news headlines have reported on the population throughout the country. Primarily in major cities such as Beijing, citizens’ quality of life is affected.
Therefore, it comes as a surprise that China has a $365bn investment into renewable energies. Fossil fuels may have been the previous driver of the contract manufacturing revolution but By 2020, this reliance should shift towards cleaner fuels.
As the world’s largest energy market, any positive trends towards renewable energy by China is welcomed. At a cost of approximately $75billion a year, a significant impact can be made. Solar power is identified as being a key area for investment. Although China already is the world’s top solar generator, their overall output relative to the countries size is relatively small. Since 2010, large-scale solar plants have decreased in cost by roughly 40%. As technology improves, the energy output cost will decrease and make the fuel source a wide spanning viable method.
Wind farms, hydro power and geothermal and tidal power will also receive extra funding. All areas are benefiting from lower sector costs leading to more attractive investment opportunities.
Compared to the United States, China’s commitment to renewable energy is over double in monetary terms. At the current rate, the US spends roughly $50bn annually, whereas China exceeds $100bn.
Benefits stretch further than cleaner air for all citizens. Employment opportunities are constantly being created in the expanding sector. With China’s commitment to renewable energy investment guaranteed until 2020, an estimated 13 million jobs will follow. In the past, fossil fuels held the key to expanding the economy. Now, as the nation looks to move away from cheap lean manufacturing, investment in emerging markets such as renewable energy should continue the growth.
Naively, experts have commented that China’s promise is hollow. Claiming to be a mere game of smoke and mirrors, purposely announced as it is contradictory to the US vision. As the United States is about to take a step backwards, in shunning scientific evidence in favor of climate change, China looks to be acting smartly in the future of their country and the world.
As with many problems China has faced, their answer appears to be money. Problems are not always fixed by throwing money about. Set within the 5-year plan is a target of 50% of China’s energy output would come from renewable sources. If achieved, a major step forward will have occurred. However, without an effective strategy, future energy projects could be mishandled, and the investment wasted.
The opportunity has been created for China to show the rest of the world how to properly commit to a green future. Many critics have been appalled at China’s pollution levels. If tackled successfully, this could be the wakeup call for many other nations to follow suit.
China’s Predicament on the Volatile Currency
Chinese firms and investors looking to expand further internationally enjoy a unique situation in the United Kingdom. Following the Brexit result in favor of leaving the European Union, the pound sterling has fallen 19% against the dollar. The currency is relatively at $1.26:£1 and extremely volatile, creating a generally negative outlook. Conversely, the FTSE:100 (built of primarily export-oriented manufacturing companies) has risen directly resulting from the depreciating currency. Despite the performance of the index appearing strong in sterling terms, it is still under performing in dollar terms. But does a falling currency actually affect China? Will Chinese firms look to purchase manufacturing companies within the EU at a reduced price?
Historically, when the U.S dollar was relatively strong, American manufacturing companies quickly pushed through mergers and new acquisitions. With the impending Brexit, many Chinese manufacturing companies may look to continue the recent trend of buying famous UK manufacturing companies and brands. This trend may take a while to occur as many companies may wait for the pound to fall further (as the currency is expected to do so). Likewise, it is hard to predict which manufacturing companies may receive the most interest from Chinese firms. Utility companies may be seen quite favorably, as they offer an essential service.
The stock exchange is not the only investment market that Chinese investors will be interested though, with real estate looking even more appealing. While large Chinese firms may have the cash to purchase entire companies, much smaller private investors may prefer to deal in real estate. With house prices in London being at extremely high levels, the devaluation of the pound will make British houses cheaper for foreign investors. The overall opinion of property experts consists of the belief that in the short-term prices may start to fall throughout London. This further creates ideal opportunities for outside investors, with more attractive prices starting to appear.
However as with all investments, the future cannot be predicted. While the pound has been devalued considerably, the value will only be realized if the currency recovers. Many investors may also feel that the currency hasn’t quite hit its floor yet and would prefer to wait for an even better opportunity in the future. Considering no formal proceedings have started for the United Kingdom to officially leave, the value for Chinese investors could still continue to grow.
China’s Infrastructure Projects: A Threat to Economic Growth?
Most analysts believe that China’s infrastructure projects may actually be harming economic growth. The benefits infrastructure investment can bring is undisputed. However, a study conducted by the SaÏd Business School suggests the majority of infrastructure investment in China is low-quality.
Projects ballooning over initial estimates and low utilization appears to be the main two problems. Construction costs on average were 30% higher than estimated, which is consistent with global statistics. The Chinese economy may face problems from high debt levels. Debt is the common way to finance infrastructure projects. Struggling projects may not see a worthwhile return on the initial investment.
Continuously the Chinese government are not afraid to invest within its own country, and even beyond. It does not matter for them even if it requires for them to be in mammoth debt. China has always been optimistic of their economy despite the current situation. Projects ambitious in size and exciting in nature are announced frequently. Setbacks do occur. Cutting of red tape also happens regularly for finalized projects.
If China wants to continue economic growth, the biggest concern is rural infrastructure. Major cities are receiving the spotlight, and most infrastructure projects are within the major metropolitan areas. However, just shy of 50% of all Chinese citizens are outside of cities. To unlock their potential, it may be worthwhile to invest more to connect these areas and help stimulate economic output. Furthermore, high quality infrastructure investment needs to become a larger priority. Poorly planned projects which exceed cost-estimates and become under-utilized will be large unwanted expenses detrimental to economic growth.
China’s economical situation is slightly precarious. The declining growth rate seen over the last several years caused concern for many economists. In recent months, positive news regarding China’s economy suggests the start of economic stabilization. Some threats can be seen from the outside, and, if known, an action or business plan can be created, though the most concerning threats are those that aren’t initially obvious. China has shown that it can manage its economy successfully, but nothing has been too serious of a disruption yet.