Factors Impeding China Economic Performance and Their Impacts on World Economy - Essay Example

Factors Impeding China Economic Performance and Their Impacts on World Economy Name Institution Course Date Factors Impeding China Economic Performance and Their Impacts on World Economy Some decades ago, China was considered a rural and poor country. This made it possible for the country to take advantage of the available potential for growth and expansion. China’s growth and expansion has been driven by heavy investments, manufacturing of commodities and availability of infrastructure (Dong, Zhang and Shek, 2006). While these factors enabled the country to grow, the nature of its industries is also the driver of its economic decline. China has undergone economic growth and development in the last years. For instance, the Chinese economy grew at annual rate of about 9.75% between 1999 and 2013. This performance however has been haltered by many factors. China’s economic growth has slowed down since the beginning of this decade (Brandt and Zhu, 2000). The economic growth of China was 9.55% in 2011, 7.79% in 2012, and 6.9% in 2013 and by 2015; the economic growth had fallen to around 6.9% (Brandt and Zhu, 2000). This fall in the economy of China is expected to continue falling in the few years to come. Examples of factors affecting the economic performance of China include the fall of GDP per capita, Real estate bubble, bad debt, devaluation of Yuan and demographic drag to name a few. Since China’s economic growth is viewed as an enabler of growth globally, any slowdown in China’s economy can have a hostile impact on the global economy (Academia.edu, 2016). For this reason, due to the recent economic slowdown of China, many economies in the world have been affected one way or another. The main purpose of the essay is to evaluate and analyse the factors that affect China’s economic performance. Such factors include the decline of the real estate sector, the current depreciation of the Yuan among others. The paper will also establish how the economic slowdown in the country affects the world economy. The decline of the real estate sector is one major factor affecting China’s economic performance. The real estate sector in China makes for about 27% of the country’s GDP (BBC News, (2016). Many factors have worked in tandem to cause decline the real estate sector. In the last three decades, Chinese economy grew by an average of 10% every year. During this period, the urban income grew by 15% annually. Notably, in the 1990s, only 18% of the households owned houses. By 2005, this number went down by about 85% (BBC News, (2016). Also, Chinese saving rate grew more and increased to 25% in 2011 from 17% in 1995. In addition, Chinese policy became increasingly accommodative. The loan rate was approximately 6% per annum which is considered low to an economy that is growing very fast. In this period, the government incentivized the purchase of land and due to the limited access to foreign investment; people started seeing real estate as a profitable investment destination. Due to the huge investment in real estate, China consumed more than 60% of cement manufactured global and more than 42 of construction machinery (Economics Help, 2011)). As a result, there were several underperforming commercial and residential properties (BBC News, 2016). In order to reduce the worsening condition of the real estate sector, the government increased the interest rates of the sector. The deflation of real estate sector began in 2013 when property prices went down. This is seen has one of the causes of China’s declining economic performance and expansion. In addition, the current depreciation of the Yuan by the People’s Bank of China led to the slowdown of the global economy. This devaluation not only affected other developing economies like India and Africa but also developed economies such as the UK and USA (Liu and Siu, 206). Many people feared that this devaluation of the Yuan was due to the slowdown of the Chinese economy. Moreover, the fallen the prices of crude oil can be attributed to the fall in demand as a result of slowdown of Chinese economy. On the other hand, the government clarified that the devaluation of the Yuan was due to the efforts to tie the value of the Yuan to the market forces. Inclusion of the Yuan in the SDR basket has brought more harms than good (Liu and Siu, 2006). Inclusion of country’s currency into the SDR basket offer say to the country in the global economy. Although China is one of the key players in the global economy, Yuan was not in the SDR basket. Determinations to add the Yuan in the SDR basket required the devaluation of the Yuan which brought havoc to the economy (BBC News, 2016). It is notably that China’s population is made up of the few working age population as it is aging swiftly. The country’s working age population began declining in 2012 and is expected to continue for years to come (Lu et al., 2008). This has been attributed to the population control policies implemented in the 1970s. Despite the relaxation of the one-child policy recently, China has yet to experience a notable acceleration in the child birth rate. However, in the years to come, the population of China is expected to increase dramatically which is expected to have a positive effect on the country’s economic performance (China population, 2016). Nevertheless, the increase in the number of children in China would increase the dependency ratio which will cause the labour resources and wages to go to the people who do not contribute to the country’s economic growth. Therefore, for the foreseeable future of China, the quantity of China’s labour will continue to decrease thereby placing drag on the country’s growth rate and performance (Anston, 2014). One of the major economic inputs of China is capital which affects its economy. Since the economic reforms in 1978, China’s economic performance has been brought about by the accumulation of capital. Between 1990 and 2013, more than 52% of the GDP growth was as a result of formulation in capital services (Nd. 2016). Capital accumulation has been noted to be unusually high in comparison with other countries. In the recent decades, China has accumulated capital very rapidly. In 2013 alone, the country spent 660 billion RMB on construction of rail and roads (Ding, Guariglia and Knight, 2010). The growth of capital formation has rapidly expanded by about 8.8% annually. In addition, China is also an investment-driven economy that has led them to experience levels of imbalances in their economy. The expansion of capital formation in China has led to low returns on investments, suggesting that their capital stock is doing little to enhance growth as a result of inefficient allocation. Another factor affecting China’s economic performance is unproductivity and fall of GDP per capita (Allen, Qian and Qian, 2005). The most noticeable manifestation of the country’s productivity problem and fall of GDP is the rapid increase in China’s debt load. China’s total debt load increased up to 251% of GDP which is expected to increase in the later years. Debt is rising at a quicker rate causing a staggering pace for China and increasing constraint on its growth. This bad debt allowed China to enhance its economy through the experienced global crisis but ultimately left a heavy repayment burden for the country (Schreurs, 2014). In addition, China is characterized by large number of middle class individuals which has caused a problem to the country in terms of expansion capabilities. China has overgrown the middle class income level which has caused barrier to its expansion. In terms of its growth, China experiences a fall in the GDP as a result of the increasing number of the middle class people. This has impeded its potential for economic growth and performance (Bernard et al., 2007). In addition, China has a weakening banking sector that affects the economy. The country’s banking system is controlled by the government. SOE’s tend to receive preferential treatment in terms of credit provision whereas the private firms often pay higher interest rates. It is believed that in most times the SOE’s are reluctant in paying their debt saddling the bank with nonperforming loans. One major problem with the China’s banking system is the ability to allocate credit in terms of market principles. This has led to increasing bad debt and thereby affecting the economic performance of China (Bramall, 2000). The economic slowdown of the China’s market is very critical to the world’s economy as a whole (BBC News, 2016). This situation will have negative consequences to some countries but at the same time creating opportunities for others. For a number of nations, the sub-7% GDP growth of the China’s economy in the future years would be a reason for celebration (Academia.edu, 2016). Therefore, the weakening economic performance of the second largest economy globally is a very substantial source of concern not only to the Chinese population but also to the rest of the world (Ding, Guariglia and Knight, 2010). Countries that are producers of intermediate goods are one of the affected. For example, Japan. The nation is a huge exporter of manufactures parts as well as components. The value-added exports to the rest of the world often go through China (Brandt and Zhu, 2000). Therefore, the economic slowdown of China’s has a very significant effect on the performance of Japan’s exports. But the outcome of intermediate-goods exporters is not set in stone. Consumers of such products are not buying fewer of them; the manufacture of these goods will be shifted from the China to a lower-cost manufacturer. For instance, Vietnam has raised its production of these goods such as smartphones and electronics; a sector where China used to relish complete dominance partially through foreign direct investment (Chen and Feng, 2000). In addition, this slowdown will primarily affect the Asian market. This is because China has contributed substantially on the growth of Asia since the year 2000 up to about 72% (Ding and Knight, 2008a). Also, European countries have been directly affected by this slowdown but at a moderate rate. According to some analysts, a loss of 2% in the growth of China’s demand over the coming years will result to a drop in the Eurozone GDP by about 0.6% (Chen and Feng, 2000). Although, the losses incurred by Europe is probable to be substantial considering the emergence of both the Asian nations and the European Union suppliers. This situation varies within the European Union itself. Among the European Union nations, Germany is the most affected by the economic slowdown of China. Their exports dropped by about 5.2% which was recorded as their sharpest drop since the economic meltdown (Economics Discussion, 2015). Furthermore, China’s economic slowdown would affect the United States as well as the European Union by exposing them to potential risks on short-term securities if China decides to continuously sell sections of their assets in order to offer greater support to their economy (Dollar and Kraay, 2004). This is because China has continuously diversified its investments in American and European independent debts over the past years due to the build-up of its huge overseas reserves. Majority of its reserves are believed to be stored in dollars and about 25% in euros (Dollar and Kraay, 2004). The economic crunch of China affected South Africa’s currency. Its currency plunged after stocks sold off in China. This owes to the fact that South Africa is one of China’s largest trading partners (Guariglia, Liu and Song, 2008). Therefore, South Africa’s economy – like any other African country – has been significantly pushed by China’s demand for natural resources but China’s economic slowdown has posed a threat which compounds to many other challenges and even worsen a food crisis. The economy of the United States has also been significantly threatened since most of its industries operating in China – which are inclusive of fast foods and retails – are expected to be continuously affected by the slowdown. In addition, the economy of the United States has struggled and statistics have shown that there might emerge instances of job losses and could commence outside those already in existence both in the mining and energy industries if the economy of China worsens (Dollar and Kraay, 2004). On the other hand, some countries have been positively affected by this slowdown. For example, India and Indonesia are principally emerging as the new export giants. These countries are investing heavily on policy reforms in order to make their logistics as well as their investment environment competitive worldwide. Another group of countries that have been affected by China’s economic meltdown sell their products to the Chinese consumers. Despite the economic meltdown in China, its markets have great potential and are the world’s most promising. Therefore, some companies take advantage of higher consumer spending therefore gaining more from the economic situation (Brandt and Zhu, 2000). Also, there are some countries that primarily benefit from China’s economic frustrations. These include countries that directly compete with China. These countries can be able to raise their global market share as China withdraws from certain areas (Chen and Feng, 2000). For example, Bangladesh has commenced to take advantage of China’s retreat from sectors such as garment markets. Its production and distribution has rapidly increased and hence Bangladesh has become the world’s second garment exporter after China (Institute of Ecolonomics, 2016). In conclusion, China as a nation was considered a very poor and rural country which made it easy for the country to take advantage of its growing population. Its growth has been primarily driven by heavy investment, manufacturing of commodities and availability of infrastructure to name a few. The country has experienced an economic growth since the last decade but the recent economic performance of China might have been caused by the following factors. Fall in the GDP per capita, real estate bubble, bad debts, devaluation of the Yuan and demographic drag to mention a few. The decline of the real estate sector significantly resulted to the poor economic performance since it constituted about 27% of the county’s GDP. The sector consumed about 60%of the world’s cement and 42% of the construction machinery. The under-performing of the commercial and residential properties crippled the sector declining its economic performance. Also, devaluation of Yuan by the People’s Bank significantly reduced their economic performance. This economic frustration of China will also bring about devastating results in the overall world economy since it is the world’s second largest economy. This will also bring about both positive and negative impacts to the world economy and also to the countries that directly relate to the country. For example, countries that are producers of intermediate goods will be mostly be affected by the economic slowdown. These countries include Japan and Germany to name a few. On the other hand, countries such as Vietnam take advantage of China’s economic frustrations by dominating completely on markets that China used to have prevalence such as production of electronics. In addition, this slowdown will also affect the Asian market since China significantly contributed to Asian growth. European countries are also likely to be greatly affected. For example, Germany is likely to suffer similar frustrations since their exports have already dropped by about 5.2% since the beginning of China’s economic meltdown (Ding, Guariglia and Knight, 2010). United States and the European Union would also be affected by this situation. This may be the case if China decides to continuously sell some sections of its assets with an attempt to secure its own economy. Furthermore, African countries such as South Africa would also be influenced by the situation in China. This owes to the fact that South Africa is one of China’s largest trading partners and also their economic performance greatly depends on China’s demand for their natural resources. Also, the economy of the United States face a crucial threat due to China’s current economic performance since most of their fast foods and retails would be directly affected by the situation. Finally, there are countries that significantly benefit from this situation. They include; India, Indonesia and Bangladesh. For instance, India and Indonesia are emerging as the new export giants by taking advantage of sectors where China is retreating from. 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