After enjoying double digit growth for three decades, China continues to find itself front and center of the world economic stage, though this time for its recent economic slowdown.
Every action China’s authorities take to rebalance the economy seems to provoke anxiety among investors, consumers, and leaders worldwide, as the slowdown of the world’s second largest economy will assure negative spillover to other countries.
I am going to show you 5 reasons why China’s economic rebalancing is actually showing signs of promise.
China’s Demographics Are Restructured
One of causes of China’s economic slowdown has been the decrease of productive workers in the labor pool due to its past one child policy. Recognizing, albeit belatedly, the impact of this policy has led China to move to a two-child policy. The lateness of this move means that China now has more non-working age (children and elderly) citizens than it does product laborers. Many analysts seem to have written off the next 20 years, during which this new generation of children will come of age, but the reality is that this policy shift will have an immediate short-term impact on consumption and investment behavior. For example, the higher number of children to feed will increase levels of consumption, and industries such as the toy industry have shown positive growth as parents seek to pacify two children instead of just one. Consumption of other items such as food, clothes, and entertainment will also grow as a result of this policy. Moreover, due to the income effect,
parents will have no choice but to work harder, earn more, and invest more in the future of their now larger families.
Rebalancing is Accelerating
China’s economic slowdown has its foundations in an unsustainable growth model which allows foreign capital to enter, enhance domestic investment, and bridge the gap between domestic investment and consumption through exports. When global demand declined sharply during the global financial crisis, China was forced to face the fact that it can no longer count on exports as its primary source of income and thus needs to rebalance its primary income from manufacturing to services. Today, government statistics show accelerating progress in economic rebalancing, with growth in the service sector moving from 48.1% to 50.5% from February 2015 to February 2016. While older industries are declining, new businesses are vigorously developing and potentially helping China to gain back its global confidence. Says Scott Richardson, Managing Director of Shenzhen-based card manufacturer Cardzgroup:
“With rising wages and reduced foreign capital the traditional strengths of the Chinese export manufacturing model are under pressure, however this has been offset by a maturing high-tech sector. In Shenzhen specifically a thriving startup scene is creating technologies that are helping to streamline production and reduce costs.”
The Yuan is now an IMF elite currency
The IMF has officially approved the Yuan to join Special Drawing Right’s (SDR) basket that will be started on October this year. This is a positive sign from China’s authorities to the global economy as this inclusion may help China to gain higher currency demand from the global economy. Although in the short run this announcement seemed to stimulate no market reaction, in the long run it is expected to induce central banks around the world to increase the demand of Yuan as part of their foreign reserves, such that the value of the Yuan is expected to appreciate back to its equilibrium. The appreciation of Yuan will reduce China’ reliance on export of manufacturing goods and refocus the economy to the service sector. The Yuan’s inclusion to SDR will also require China to further liberalize its financial sector by opening up new investment areas beyond the traditional ones of manufacturing and real estate.
Financial Reform is on the Way
China has long maintained a strict peg of the Renminbi to the US dollar. In the third quarter of 2015, it stunned financial world by loosening its peg and thereby letting its currency be determined by the forces of global financial markets. By doing this, China has reduced its level of government intervention in its currency but still manages currency fluctuation to give room for markets to react rationally and avoid unexpected moves. Moreover, the People’s Bank of China has thus far been consistent in implementing a prudent monetary policy that is consistent, stable and forward looking. The releasing of the peg is one positive commitment of China’s authorities to induce domestic consumption buy foreign goods, shrink its trade balance, and reduce its dependence on exports and investment. In addition, PBOC has also committed to optimizing financing and credit structures to help foster the rebalancing process as well as control inflation, a move which will bring down labor costs– one of the causes of the slowdown– and allow China to be more competitive with emerging market economies.
China is Simply Too Big to Fail
While the phrase brings back unhappy memories of the Lehman Brother’s failure that set off the GFC, it is true: For more than 30 years, China has been a primary engine of global growth, the source of cheap labor and primary destination for Foreign Direct Investment worldwide. The economic spider web China has created comes with too great a cost should it be allowed to unravel. Global leaders have been paying close attention to China’s economic performance and watching for signs of diminished investor confidence. However, even in the middle of its recent crisis, new investment agreements between China and other industrialized nations such as the United Kingdom have been struck and inspired a tone of optimism.
China is currently in the middle of a very bumpy economic transition, make no mistake about it. However, predictions that it is going to unravel are far too premature, especially considering that its growth is still above average for emerging market economies.
is an Asia business consultant with his firm GlobalFromAsia.com.
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