Stabilization: The First Right Step for China Growth

Questions have risen from many economists about the sustainability of long-term growth. Many highlight the difficulty for nations to transition from an unsustainable manufacturing-based economy to a services and consumption based one (as seen in more developed countries like the USA). This manufacturing-based economy is, in all likelihood, what you are most aware of in relation to China.

The country heavily relies on its exports which is a big part of their economy. The rise of e-commerce also helps them a lot given consumers around the globe can have better access of Chinese products at the lowest price possible never seen before in time.

Meanwhile, China’s leaders aim to shift the economy from a reliance on investment and exports for growth to one where consumption and markets play a bigger role. As a result, the government began promoting new policies, including a stimulating domestic demand, lowering the price of oil, enacting energy-pricing reforms, improving welfare coverage and privatizing firms. All of these developments are in place to help China sustain long-term growth.

The upside potential could reduce the negative impacts of poor debt repayment and increase the labor market as economic growth moderates. As the population ages and less workers enter the labor force, China can satisfy its labor demand with reduced levels of growth. It is truly the sign of a maturing economy.


China Leads Global GDP Growth

Many countries around the world have been feeling the strain put upon them over the last few years. The majority are still recovering from major crisis’s such as the 2007 financial collapse or the Eurozone crisis seen in the tail end of 2009 and onward. However, with recovery coming to fruition many are starting to have a net positive impact upon the world GDP. Despite this, it is still China who are contributing the majority towards the growth rate.

China is expected to once again contribute 1.2% or more to the global GDP growth for 2018. Some may think 1.2% is a small number, it must be taken into context. The total growth rate that has been predicted by the International Monetary Fund (IMF) for this year is 3.1%. This means that China is contributing a sizable 38.7% to the growth rate. With so many powerhouse economies existing around the world it is surprising that China is contributing more than their fair share.

There are several reasons why this could be the case. Previously mentioned was the fact that many countries have struggled due to the economic climate both domestically and internationally. The US for example has the largest economy, but with a growth rate of 2.3% for 2017, their impact on the overall global GDP rate is a mere 0.3%. When directly compared to China this is around 4 times less.

Other reasons also include the fact that China is a large economy that continues to grow at a fast speed. Therefore, it only makes sense that a major fast-growing economy would have such an impact. This can also be seen in the example of India, currently 7th when countries are ranked in nominal GDP. However, when ranked in terms of purchasing-power-parity then the country would be ranked 3rd. For India, their expected growth rate is above China at 7.4%, and contributes 0.6% to the global GDP growth. While this figure is considerably lower than China’s, it still punches above its weight when compared next to the shoulders of others.

Stephen Roach, chairman of Morgan Stanley Asia Ltd who is considered to be an expert on economic matters said, “China remains the world’s major growth engine.” He also went on to say for continued global economic growth the result would be “heavily dependent” on China, considering the transitioning economy being seen within the nation. Roach also believes that if this transition is successful then many other major economies will benefit as China rises up through the ranks as trading partners.

It may have become an annoyingly common discussion point, but it is just as important than ever. China’s changing economy has powerful potential that can drive global growth and help fuel and shape the future. In a sluggish economic environment China continues to shine the brightest, and while many concerns have started to be aired about the long-term sustainability of this scenario, for now, it looks likely to continue.

Does the Continuous Growth of China’s GDP Calls for Concern?

Despite this continuous level of growth, there has been significant pressure on the economy. Certain sectors are seeing declining levels of growth in terms of investment, particularly infrastructure and manufacturing which saw a drop to its lowest rate since the turn of the millennium. However, it is still growing, at a rate of 9%, and while the trend appears to be concerning the warning sirens won’t be going off for a long time yet.

Continuous GDP growth should not be one that will concern the Chinese government, as the trend would have been predicted due to the changing economy model. The rise of China has been due to being able to offer cheap manufacturing exports across the world, a model that is not sustainable over the long term. However, with rising levels of disposable income across citizens, the nation looks to increase reliance on services as well as goods consumption. Therefore, because this transition is moving away from manufacturing, it should be expected that investment in the manufacturing industry will decrease.

Further evidence that supports this is the trends seen within the retail industry in China. Retail sales were up a significant more or less 10.5% this year when compared with the previous year, exceeding the predicted 10% increase. The services industry as a whole accounted for almost 60% contribution to the country’s GDP with the manufacturing industry falling to as low as 30%. This only means the services industry is underlining its importance to China’s economy in general.


Impact of the Manufacturing Industry

Despite the transitioning phase on to the services and consumption-based economy, the manufacturing industry continues to hold solid ground even if other number shows a decline in term of investors. A reversal of the previous contraction seen in the Purchasing Managers index (PMI) has continued.

The Purchasing Managers index is a useful tool which gives an overview of the general health of the manufacturing industry. Data is derived from a survey sent out to companies and encompasses five major indicators such as: inventory levels, production, new orders, employment environment and supplier deliveries. As with most statistics, it is not necessarily always the most accurate representation of the current environment. However, many values the index and the results are used to make key decisions within many companies.

The figure of 50.2 for November of 2018 still represents growth as the index uses 50 as the mark for remaining the same. Anything below is a contraction, whereas all figures above shows a rise. Alternative measures also support the latest results, with their own measurements coming in at 50.1 or 50.2. All numbers above the 50 mark and even though it is up a small decimal, it still represents progress.

Meaning of PMI Numbers to the Industry

The consistent above-50 PMI mark speculates on a possible stabilization of the manufacturing industry. Particularly in areas like production and demand. Furthermore, news from the non-manufacturing sub-index also suggests there is a growing confidence throughout the country.

A link can also be made between the manufacturing industry and the government’s investment. Many local governments are continuing to invest into infrastructure and the budget priorities has never been this high on infrastructure.

Other experts believe that while this news is positive, there is a problem of short sightedness within the government. While the short-term boost is welcome, economists are concerned with high levels of corporate date and excess capacity levels.

On the other hand, industrial profits have performed better now including export, industrial production and import figures are all exceeding expectations.


Education Reforms also Supports Economical Transition

Education in China has always been held in high regard. Schooling is compulsory for children, and the country provides a suitable framework to ensure students are able to reach the minimum criteria deemed necessary. Currently the Ministry of Education estimates that around 99.7% of the entire population has achieved the nine-year basic standard. However, due to China only recently seeing growth resulting in strides towards becoming a first world country, the nation still has further to go in terms of education.

Importance of Higher Education

Higher education refers to students who continue to study past the compulsory age. This usually means going to university or a college but may include trade schools and other similar professional paths. This area is also seeing consistent growth, much like the nation’s economy. Many government officials recognize the link between professional graduates and economic growth, and this has resulted in more students than ever continuing higher education, as well as more universities being founded also.

In 2010, over 30,000 students were studying for a PhD, a number almost 3 times higher than the United Kingdom. Positive statistics such as this are owing to the education reforms implemented within China starting around the early 90’s.

Education has come a significantly long way. In 1990, the countries Growth Enrollment Ratio was only at 3-4%. However, in modern times, this number is hovering around 30%, and looks to continue further.

The Link to Economics

Economic commentators have gone so far as to suggest that education may be China’s “hidden weapon”. The importance of education ingrained within Chinese culture means parents are willing to invest heavily into private schools, seeing the cost as an investment into their child’s future.

The trends occurring within the Chinese education sector will effectively result in more professional and skilled workers. These enhanced skill sets should enable the country to grow faster and have citizens able to tackle the new jobs that a changing economy brings. Furthermore, China is attracting increasing numbers of international students to the country, which also helps fuel economic growth.

Lessons can be learned from the situation Mexico found itself in the middle of in the late 80’s. The country saw rising income levels and hoped to have more skilled jobs to offer citizens. However, due to the education system being lackluster, there simply was not enough in the labor pool to maintain the level of growth being seen. If China follows a similar path, they can expect factories to move to cheaper Asian competitors, as well as foreign investment to become less frequent.

South Korea can show China the other side of the coin. The 70’s and 80’s saw the country riddled with sweatshops and citizens working in low-skilled manufacturing jobs. But, with a committed government, these citizens slowly transformed into a highly skilled and educated workforce, one that was soon demanded by high paying employers.


Conclusion

The manufacturing industry has already stabilized. Even though we can expect it to drop off a little due to the growing services industry, this should not pose as a threat to China’s transition. The educational sector is also doing its part suggesting China has come a long way in terms of growth. However, there is still much further to go.

Rural areas in particular are still not quite reaching the aspired levels. With the current level of growth, the pressure is much more significant to produce the workforce China needs. However, it does appear the country is willing to invest significant funds to ensure results are produced, with current GDP expenditure being roughly 4% or somewhere around that number.

Pressure is not only felt by China but by the global economy, in general. While improvements have been seen since the recession, the general feeling is that there is still a lot to work on. China has been an emerging economy throughout this whole time, outshining all other countries, resulting in significant focus being placed upon the nation’s economy. This achievement has been surprising considering the nation has seen declining growth levels but they are still in a strong position with an actively involved government who are aware of the issues at hand, but furthermore aware of the importance of carefully managing the future.

All signs are pointing towards a stabilizing economy, but the long-term stability of the country is still being questioned. Key issues like excess capacity issues are not being addressed hard enough and increasing levels of debt continue to make some experts concerned. Overall though, for now, all positive news is welcome, and if the trend continues, the economy may start gaining more momentum as it looks to get back on track.

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