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Wednesday, March 21, 2018

Mourning China’s economy wishful thinking

Evil tongues are predicting the Chinese economy has bleak future: businesses are closed, labor becomes more expensive, the system of credit slips. In July, private investment decreased by 1.4%, investments in fixed assets of state-owned corporations – 14%, exports in comparison with last year fell by 4.4%, imports – by 12.5%. But is it really “the Chinese miracle” has come to its finale?

In late August, foreign Ministry spokesman of China, Lu Kang said that in the international community “all are fully confident in the economic performance and development potential of China in the future.” And referred, in particular, former assistant Secretary of the Treasury Charles Collins, who believes that in the next 10-20 years the Chinese economy will increased growth. “This confirms the fact that all are fully confident in the economic performance and development potential of China in the future,” summed up Lou Kahn.

“China is fundamentally different from Western economies, so it should not use American or European patterns to predict the future of the national economy of China”

These words were occasion – a number almost apocalyptic predictions made in the media and drawn to China. Yes, the world economic map is changing, and the old competitive advantages of the Chinese economy are no longer valid. No more cheap labor, lost the advantages of moving production facilities and creation of enterprises with participation of foreign investments. There remains only a huge domestic market with its enormous potential. Taking into account these circumstances, Beijing is revising economic strategy of the country. The Chinese economy is transitioning from the old model focused on investment, production and exports, to a new based on consumption and service, and has achieved notable success in this regard.

Newspaper OPINION wrote that the slowdown of the Chinese economy is a side effect of the change of model of development – from increasing exports at any cost to stimulate domestic demand. In 2002 XVI Congress of the CPC defined the goals of the authorities four times to increase the welfare of the average Chinese by 2020. And in March of this year, it was confirmed that the current five years will be decisive in building a moderately prosperous society. In the end, gross domestic product per capita in China is close to 10 thousand us dollars and China will become a state with high income levels. The investment of China in research will increase to 2.5% of GDP, and the ratio of the contribution of scientific and technological progress to economic growth will rise to 60%.

Between the reforms in favor of the growth of wealth and consequence of these reforms in the form of falling growth rate of the economy as a whole there is a conflict. In China it is also a conflict between the two groups. We can assume that the cleaning result elite of China under the banner of the fight against corruption backstage confrontation between the two political blocs in China’s leadership and the PDA unit, provincial authorities, and Central government block is completed with the victory of the latter. And this may explain causing undue panic in the financial markets the economic reform of China. “We have made a final decision on the transformation of economic growth model, the release of the new path of green and sustainable development”, – emphasized in Beijing.

Contradictions in the development of China’s “new reality” the emphasis is on structural reforms, overcoming of excessive dependence on their exports and the growth of investment in fixed assets. In other words, it is now a question of the primacy of sustainability of growth, not increasing his pace. The Chinese government calls it “targeted regulation through the establishment of reasonable limits.” Under his plan, 13th five-year plan (2016-2020) average annual growth rate of China’s GDP to exceed 6.5% and import 10 trillion dollars. For any country the task of maintaining a long-term GDP growth rate of 7% per year would be considered over-ambitious, but not for China. Here the government has to explain why the envisaged slowdown from the previous result more than 10% per year.

Simply put, China is intentionally slowing economic growth for structural reforms in the productive forces, improve labor productivity, reduce resource consumption and energy intensity of the economy. And the price will be the closing of a large number of companies – and hence more modest growth forecasts, and the struggle within the Chinese elite.

From the point of view of ownership structure in Chinese industry is dominated by three main sectors. Although there is a fairly large private sector, it is much less than that controlled by the provincial government. The big conglomerates – this is the enterprise under the Central government. The government strongly forced the province to get rid of inefficient financial companies, but provincial authorities were bracing. The final decision certainly will be a compromise, but the question remains, on what conditions the compromise is reached. Face two forces centralization vs. decentralization. Corruption scandals in this political struggle are the weapons of both sides, but the decisive element of victory center has become a very problematic situation with the debt obligations of provincial governments and their banks.

The development of the country and significantly constrained by a lack of natural resources. To raise the welfare (and hence domestic consumption) of the Chinese four times, the consumption of these resources must be twice, and better three times more to the current level. But there are some problems with logistics. Simply not enough transport capacity to ship iron ore, alumina or bauxite from the ports inland to the enterprise.

Optimization of structure of economy without the loss of speed of its development is hardly possible, especially the financial performance of the national economy in China is not high enough. If a huge number of provincial enterprises – small and medium – must be closed (now they only exist at the expense of the provided and renewable loans from the public provincial banks), it automatically means the decline in domestic production and rising unemployment, there is a decline in aggregate effective demand, and in China and so more than 200 million people live below the poverty line. By 2020, the population will amount to 1.42 billion people, and seeks to bring out of poverty at least 70 million citizens. The global crisis had hit China, but the task of raising living standards the government has not been removed.

To soften the blow, are used as non-economic and economic methods – adjustment of fiscal and monetary policies, reform of the banking and customs regulation, the extension of pension programs, medical insurance and environmental protection “in the interests of selecting the best and the worst dropout rate in the conditions of market competition.” Deepening the reform of the tax system, the financial policy of Beijing remains strong and the monetary – weighted, which aims to avoid some systemic risks. With regard to external suggestions China is ready to take on more responsibility in international Affairs and proposes a new concept of global governance. XI Jinping has stressed that this system is designed for use throughout the world, it can not unilaterally dispose of any one state.

Goldman Sachs admits the rising status of China in the “chain of the global increment value” and argues that the country’s transition to “new economy” is already the effect. Moody’s forecast economic growth of China in 2016 and 2017 to 6.6 and 6.3 percent, respectively, citing the fact that “the Chinese economy remains stable, prices for consumer goods rise, increase investment in markets of emerging market economies”. That is, the economic crisis in China is not. There are temporary costs of change of strategy.

At a nominal GDP exceeding $ 10 trillion, the Chinese economy has become the world’s second – and first by volumes of industrial production, providing 25% of world economic growth. And China gradually turns into the state of innovative type. One of the main objectives of the five year plan is to “improve the quality and efficiency” at the expense of accelerated growth of total national demand and consumption, which will be held amid “large-scale investment activity abroad”. About 30 thousand Chinese enterprises conducting business abroad, millions of Chinese living and working in different parts of the world, the volume of China’s direct investment to other countries exceeded $ 1 trillion dollars, and over the years 13th five year plan will grow by $ 500 billion. Herewith, foreign assets of China are estimated at 7 trillion dollars. USA.

The total GDP of China by the end of the five-year plan will reach 14 trillion dollars, which will be equal to 70% of US GDP, and the difference between the two countries will continue to decline. China would provide the world a huge market, sufficient capital, the wealth of goods and even more valuable chances and opportunities. Moreover, the Chinese Academy of contemporary international relations said that “in the next five years, China will systematically give the world a new chance in overcoming global economic depression. Achieving this goal is possible in various ways, and it was around the country’s leadership was a bitter, but hidden struggle due to deep-rooted and complex economic conflict.

In short, “do not wait”. China remains the most dynamic economy in the world to successfully crucial domestic social problems. But it is fundamentally different from Western economies, so it should not use American or European patterns to predict the future of the national economy of China. It still has a huge potential, whose implementation will inevitably change not only the China and the entire Asian region, but also the international rules of the game.


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