China stagflation strikes, Ratings
Jugal Kishore Sharma
A. ECONOMIC OBJECTIVE AND KEY POLICY COMMITMENTS
Economic Objective
China’s medium and long-term development goal is to maintain the sustainable and healthy development of the economy, transform the economic development pattern, double its GDP and per capita income for urban and rural residents by 2020 from its 2010 level based on much more balanced, coordinated and sustainable development; build an innovative economy with considerable increase of scientific and technology's contribution to economic growth; basically accomplish industrialization, significantly expand IT application, markedly improve the quality of urbanization, notablely modernize the agriculture industry and effectively construct new rural communities, put in place a mechanism for balanced development among regions; further open up the economy, significantly enhance international competitiveness. China will keep household incomes growing in line with the economic development, and achieve overall balance of the major policy targets, including economic growth, employment, inflation and balance of payments. China 's economic and social development in 2014 is anticipated as follows: -Keep economic growth within a proper range. GDP is projected to grow by around 7.5%.Efforts to comprehensively deepen reform will further boost the impetus and vitality of the economy. Policies and measures introduced earlier to stabilize the growth will continue to take effects, to which consumption, investment and external demand all contribute. Whereas,China has entered a crucial stage of transforming its growth pattern. The anticipated growth rate of around 7.5% is flexible and indicative. -Focus on quality improving and upgrading of the economy. China will accelerate development of modern service industries, to continuously raise the share of value-added by the service sector in GDP. China will increase the ratio of the R&D spending in GDP,accelerate the transformation and upgrading of traditional industries, facilitate the healthy development of emerging strategic industries, orderly promote the new urbanization and more balanced development among regions. Energy consumption per unit of GDP will decline by more than 3.9%.-Maintain price stability. CPI growth will stabilize around 3.5%. The basically balanced aggregate supply and demand, continuous increases of grain output and the amply supply of almost all products lay a solid foundation and provide favorable conditions for stable prices. -Giving high priority to improving people’s wellbeing. More than ten million new jobs will be created in urban area this year, with registered urban unemployment rate below 4.6%.Urban and rural household incomes will increase basically in line with economic growth.China will further improve the social security system and ensure equal access to basic public services. Construction of 4.8 million government-subsidized housing units will be basically completed in urban areas, and another over 7 million units will start constructing.Comprehensive Growth Strategy — China | 2 -Maintaining basic balance of international payments. Total imports and exports will grow by 7.5% or so, with more rapid development of trade in services. Investment overseas will continue to grow, while FDI will remain stable with improved structure.China’s economic adjustment and reform could contribute to continuously releasing and increasing the growth potential, maintaining stability and sustainability of the growth and improving its quality, achieving full employment and reducing income gaps, therefore,steadily increase household income and consumption capacity, so as to increase global demand on a sustainable basis. China’s adherence to reform and opening up, especially by promoting trade and investment liberalization and facilitation, will contribute to sharing growth bonus with other members, and achieving the G20’s aggregate growth ambition.Key Commitments China’s top five key reform areas are: (1) the “new macroeconomic policy responses” to stabilize near-term growth, (2) “transform the economic growth pattern” to further boost consumption, (3) improve “competition” to allow the market to play the basic role and promote private sector involvement, (4) promote “urbanization” to support growth and employment, (5) reform the fiscal and financial sector. B. ECONOMIC OUTLOOK AND CHALLENGES TO GROWTH Key Drivers Domestic demand continued to be the key drivers of growth, with consumption as the basis and investment as the key. Domestic demand contributes 104.4% to growth in 2013. Consumption is the main focus of boosting domestic demand. In 2013, total retail sales of consumer goods amounted to 23.78 trillion yuan, growing by 13.1% year-on-year. In particular, housing decoration, sales of furniture, and sales of household appliances and audio & video equipments grew by 22.1%, 21% and 14.5%, respectively, vehicle sales grew by 13.9% to 21.98 million. Enormous potential arose in new patterns and new areas of consumption. Consumption on IT products grew by 28% to 2.2 trillion yuan, revenue of domestic tourism grew by 15.7% to 2.6 trillion yuan, and the turnover of e-commerce grew by 25% to 10 trillion yuan. Investment is crucial to keep growth stable. In 2013, total investment in fixed assets grew by 19.1% to 44.63 trillion yuan, in particular, private investment grew by 23.1%, accounting for 63% of the total (excluding investment by rural households), 1.8 percentage points higher than the previous year.China will fare the worst if spiking inflation, slowing growth and rising interest rates lead to stagflation, according to the results of a stress test of 20,000 companies conducted by credit rating agency, S&P Global Ratings.
Stagflation is characterized by rising prices and slowing economic growth or high unemployment.
“Now that China’s growth is slowing down, they’re taking a double hit, both from slowdown in growth and price pressures coming up from overseas because some of the components are being imported,”
As of 2019, China has the second-largest economy in the world with a GDP of $14.3 trillion, behind the United States GDP of $21.4 trillion.1 If the economy were represented in purchasing power parity (PPP), China edges out America as the largest economy with a purchasing power of more than $23.5 trillion.2
How did China go from a poor society, devastated by World War Two and its own civil war by the mid-20th century, to the number two economy today? After decades of economic stagnation and setbacks under Communist rule, China began to open itself to international trade and liberalize the economy when it established diplomatic and trade relations with the U.S. in 1979. As China's subsequent export growth fueled the growth of manufacturing and urbanization, China rose to be a major global economic power over the next four decades.3
China has faced criticism about how its economy has been able to sustain an average annual growth of almost 10%, though this has slowed in the last few years, with a growth of 6% in 2019, still within China's growth targets. Namely, the government has been accused of manipulating the currency to keep Chinese exports attractive and of not disciplining companies that engage in intellectual property theft.
**China's strong productivity growth, spurred by the 1978 market-oriented reforms, is the leading cause of China's unprecedented economic performance. Despite significant obstacles relating to the measurement of economic variables in China, these findings hold up after various tests for robustness-Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth. Economic growth is commonly measured in terms of the increase in aggregated market value of additional goods and services produced, using estimates such as GDP.**
Forty years ago, after a long period of economic stagnation, China was not in the world’s top eight economies. Today, thanks to a breathtaking social and economic transformation that began in the late 1970s, China is on track to overtake the United States as the world’s number one economy within a few decades, if not sooner. By some measures, it has already done so. We are living in what many are now calling ‘The Chinese Century’.China’s economy is the second-largest in the world, behind only the United States. But after three decades of spectacular growth, China is now moving into a slower growth phase – an inevitable result of its transition from a developing economy to a more mature, developed economy. In the 1980s, 1990s and early 2000s, China’s annual GDP growth frequently exceeded 10 per cent, with an estimated 2019 growth of 6.3 per cent, although this is likely to be closer to 6 per cent with the impact of the US-China trade war.
In coming years, the International Monetary Fund (IMF) forecasts China to continue growing at a rate of 6.3 per cent in 2019 and 2020 and 6 per cent in 2021. These forecast figures still put it well ahead of most other major economies’ growth rates and keep it on track to eventually overtake the US as the world’s largest economy. Manufacturing, services and agriculture are the largest sectors of the Chinese economy – employing the majority of the population and making the largest contributions to GDP. Since 1949, the Chinese Government has been responsible for planning and managing the national economy. But it was only after 1978 – when Deng Xiaoping began market-based reforms –that growth began to take off, averaging 10 per cent annually for some 30 years. During that period, the size of the Chinese economy grew by roughly 48 times, from USD 168.367 billion (current prices) in 1981 to USD 11.01 trillion in 2015.
Since the introduction of Deng Xiaoping’s economic reforms, China has what economists call a socialist market economy – one in which a dominant state-owned enterprises sector exists in parallel with market capitalism and private ownership. It was the active encouragement of private enterprise from 1978 that enabled China to kick-start the long expansionary boom that continues today. Private businesses now produce more than half of China’s GDP and most of its exports. They also create most new jobs.
The irresistible rise of China has implications and consequences for us all on so many levels and it largely comes down to one word: opportunity. For Australia, and Australian businesses in particular, has there ever been an opportunity like China?
Key Takeaways
China's economy has grown to one of the largest and most powerful in the world over the past few decades.
Driven by industrial production and manufacturing exports, China's GDP is actually now the largest in terms of purchasing power parity (PPP) equivalence.
Despite this growth, China's economy remains strictly controlled by its government where there are accusations of corruption, unfair dealings, and falsified data.
Industrial Growth
Like most countries looking to develop their economies, China’s first step was to build up its heavy industry. Today, China is the world's leader in manufacturing and produces almost half of the world’s steel.4
China’s mining industry extracts coal, iron ore, salt, oil, gas, and gold. To reduce China’s dependence on coal, the country is moving towards more renewable resources and plans to increase its natural gas use in the coming years. China also has multiple oil reserves, as well as natural gas deposits that have yet to be fully explored.
The country is also a good candidate for hydroelectricity production, and in 2012, the Three Gorges Dam was completed and is now a major producer of electricity for the southern cities of China (including Shanghai).
Manufacturing Revenue
Most Americans know that China is a manufacturing powerhouse. Besides its large textile manufacturing sector, the economy also supplies machinery, cement, food processing, transportation devices (trains, planes, and automobiles), consumer goods, and electronics.
Not only does China have many domestic firms that create hardware and software, but the country is also a leading assembler of foreign electronics. The Chinese software and IT industry grew by over 14.2% from 2018 to 2019, generating revenue of approximately $940 billion.5
Similarly, China produces automobiles in factories owned both domestically and by foreign companies. However, most automobiles, domestic- and foreign-branded, are purchased by people in China, a country that had 340 million vehicles in 2019. Chinese vehicle sales did decline in 2019 by 8.2%.6
The Chinese automobile industry is criticized for IP theft and for a bad safety record with cars produced by domestic firms. The majority of cars manufactured by Chinese companies are exported to Africa, South America, the Middle East, or Russia. Because of China’s unique distribution and sales methods, car dealerships and salespeople make a high margin on each vehicle sale.
Large Production Pharmaceuticals
The Chinese pharmaceutical industry is, like the rest of China, growing at a fast pace. China’s drug distribution system is multi-phased: drugs pass through various tiers and expensive middle people before arriving at hospitals and pharmacies. This industry is, again, plagued with criticisms of IP theft.
Domestic firms are the majority of the market but international companies like Pfizer (PFE), GlaxoSmithKline (GSK), Novartis (NVS), and AstraZeneca (AZN) also have a presence. With China reforming and regulating the pharmaceutical industry (increasing OTC access and enforcing patents), there is a high potential for investment growth in this area.
Chinese Consumerism
While once a country with rationing and consumer good shortages, after economic liberalization, China can be a consumer paradise for the few with means and a love for luxury goods. China is home to some of the largest shopping centers in the world, and, in addition to wholesaling, retail contributed $1.8 trillion to GDP.
Companies like Alibaba (BABA) have given a big boost to retail and e-commerce. Alibaba's Singles Day sale in 2019 saw a record-breaking $38 billion of sales in just one day.7
In 2019, travel & tourism in China contributed $992 billion to the Chinese GDP. Other services that are big in China include transportation, real estate, and construction.
China's Economic Concerns
While China’s growth seemed unstoppable at one point, there are obvious cracks in the economy that have slowed it down. First off, the country is under fire for the amount of non-renewable resources it burns through each year. With China already considered a large polluter and emitter of greenhouse gases, the expected increase in coal usage is troubling to some.
Next, China is home to rampant corruption. The national government is actively trying to stamp it out in an effort to make the country more business-friendly for westerners and to avoid the economic and business inefficiencies that come from corruption. Finally, there’s the problem of underemployment and inflation in China. Chinese farmers on small plots of land are marginally useful and, in an efficient market, would be unemployed. Although inflation in 2019 was a manageable 2.3%, the last 20 years have seen the inflation rate vary wildly, a concern for businesses wanting to invest in the country.
The Bottom Line
China has the first or second-largest economy in the world depending on whether you’re looking at GDP or PPP. However, perhaps significantly, the country is not nearly as developed as other countries in the top 10. Government spending is a key driver of growth which has over the last few years led to indiscriminate construction. Even with the largest population on earth, China struggled to find buyers for real estate in its ghost towns. But the government's latest agenda focuses on stimulus to reinvigorate economic activity and if that happens the country has huge room to grow.
