GOOD READS

Problems Loom For The Chinese Economy

In 2010 China became the world's second largest economy, exceeded only in gross domestic product (GDP) by the U.S. economy. Japan was a distant third, eclipsed by China in 2001 and every year thereafter. By any measure, China's success over the last three decades has been extraordinary. China's agricultural and industrial production both surpassed the dollar value of the U.S. output for 2010; yet some analysts see problems looming for the Chinese giant in the years ahead.

SEE: Investing In China

Disparity
As hard evidence of China's current economic power, as of December 2011, the nation held $1.1529 trillion in U.S. debt. Although China is America's biggest creditor, a recent trend indicated that China wasn't buying U.S. securities at its previous rate, and although the Chinese economy appears to be booming, and many a new millionaire has been created in recent years, per capita income remained below the world average.

This disparity in income and additional economic and structural issues facing the Chinese economy have been cited as potentially major problems for China in a new study by the World Bank.

China 2030
In the World Bank's report, titled "China 2030," the Chinese government is urged to transform their currently hybrid economy - much of it is still controlled by the state - to a complete market economy. The government was also urged to reign in the excessive power of state-owned industry to encourage private enterprise and to close the gap on the increasing inequality of income.

The nation's development pattern over the past 30 years or so, since China's transformation from communism to state capitalism with remnants of communist control, has been uneven. A major issue beyond economics, although related incidentally, is the degradation of China's environment. Unless this, among a slew of problems, are addressed and resolved, says the World Bank's report, China's growth is unsustainable.

The World Bank's report is especially timely, as China has recently come under new governance, and the report could have a major impact on government policies proposed and initiated by China's new leader.

Among the pressing economic challenges confronting China's new leadership is the struggling global economy, which could seriously impact China's flourishing export business. The economies of China's principal buyers of its goods - the U.S., Japan and Europe - are weak and facing increasing debt, which threaten to curtail import purchases.

These global issues translate into domestic issues for the Chinese economy. Major state-owned banks face increasing risk, as the economy gears down due to declining exports. Add to this the risk of inflation, the state's financial support of public works and industry, and ever-increasing global and local debt, and the economic picture turns grim.

Further exacerbating these problems is China's low consumer demand and high savings rate, its questionable ability to provide new jobs for people entering the work force, and its need to fight corruption and economic crimes.

Challenges also exist in China's real estate sector. A real estate boom, driven by debt, and once encouraged by the government to stimulate domestic consumption, now seems shaky.

One almost universal complaint against the Chinese economy is its currency manipulation. The Chinese global exchange rate - the value of the yuan against other national currencies - is set by the government and not by the foreign exchange market, and it's pegged against the greenback.

Currency plays a key role with trade between China and the United States. China deliberately undervalues its currency, making its exports to the U.S. cheaper, and U.S. imports more expensive. As a result, U.S. manufacturers post smaller profits, U.S. jobs are lost and the U.S. has an enormous trade deficit with China; the deficit was recently reported to be at $31.5 billion.

The Bottom Line
According to the Chinese government, a long-term plan is currently in place to combat these issues. The government has started to develop nuclear and alternative energy sources as a supplement to its oil and coal production. Plans are also in the works to increase domestic consumption in order to replace dependence on exports for growth. If the plan is implemented and the changes are made, the Chinese economy is expected to keep growing at about 8% annually for the next few years, and it will then slow to about 5%.

At this rate, by 2030, the Chinese economy would surpass that of the U.S., but without far-reaching government economic, financial and environmental reforms, potentially disastrous recessionary consequences may hit China, and could affect the entire global economy.



More From Investopedia

Quiz: How well do you know India's economy?

Question 1

Which of these products is India the world's largest producer of?

Poll Choice Options
  • Wheat
  • Rice
  • Milk
1
2
3
4
5
6
7
8
9
10

Latest News

  • Rupee falls for third day; foreign fund inflows key

    The rupee weakened for a third consecutive session on Wednesday, falling below the 61 to the dollar mark for the first time in more than a month, hurt by good demand for the greenback from importers and by continued weakness in Asian currencies. Most emerging Asian currencies fell as the Chinese yuan extended its recent decline to a 16-month low, while the Indonesian rupiah touched its weakest level in more than seven weeks due to increasing month-end dollar demand. It is likely revolve …

  • Procter & Gamble quarterly profit rises on home care sales

    Procter & Gamble Co , the world's largest household products maker, reported a higher quarterly profit on Wednesday, helped by an increase in sales of its home care products. Sales were unchanged at $20.6 ... …

  • HC pulls up Delhi chief secretary over water-logging

    New Delhi, April 23 (IANS) The Delhi High Court Wednesday pulled up the city chief secretary over water logging in the capital during the monsoon. A division bench of Chief Justice G. Rohini and Justice Pradeep Nandrajog slammed the city government, saying nothing was happening in the city as per the master plan. The court had summoned the chief secretary after the authorities failed to submit a report on short and long-term measures to tackle water-logging in the city. "We are living in an …

  • DLF slides 3 percent, underperforms rivals

    Reuters Market Eye - Shares in DLF, India's biggest real estate developer, fell 2.99 percent, sharply under-performing a 0.4 percent gain in the Nifty and posting their sixth decline in the past seven ... …

  • Mobile number portability requests up by 2.47 mn in February: TRAI

    New Delhi, April 23 (IANS) Requests for mobile number portability (MNP) increased by 2.47 million in February last, data released by the Telecom Regulatory Authority of India (TRAI) said Wednesday. The number of MNP requests increased from 111.94 million subscribers at the end of January last to 114.41 million at the end of February. …

IN-DEPTH ANALYSIS & INTERVIEWS

  • This might well be India’s biggest Ponzi scam

    It was just too good to be true. Ashok Khital, 45, displays every symptom of a man who knows he's been conned. …

  • India's star studded football league

    High and mighty including Sachin, Salman & Sun Group buy ISL teams …

  • Leaderspeak with Rajesh Janey

    Rajesh Janey, President - India & SAARC, EMC shares many firsts in his life. …

  • Seed of Doubt

    Field trials have been allowed again in India. But two decades after their global launch, genetically modified (GM) crops remain controversial. …

  • Power Hungry

    Gujarat has power round-the-clock. Most other states do not. Why this will matter in the general elections. …

  • Etcetera

    The most keenly watched contest of the current general election will be the one for the Varanasi parliamentary seat, where the Bharatiya Janata Party's prime ministerial hopeful Narendra Modi squares off ... …

  • Economy vs Democracy

    As the country gets election fever, cash comes out of mattresses and turns into liquor, gifts, and food. But it is not bad for the health of the economy, reports Sarika Malhotra from the trenches. …

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    16.52-0.33-1.96%
    UNITECH.BO
    14.31-0.27-1.85%
    SUZLON.BO
    120.40+7.00+6.17%
    FRL.BO
    66.05+4.10+6.62%
    MANGCHEM.BO
    54.40+1.65+3.13%
    HCLINFO.BO
  • Price % Gainers
    Price % Gainers
    NamePriceChange% Chg
    16.20+2.70+20.00%
    JAGSONPH.BO
    53.50+8.90+19.96%
    RUSHIL.BO
    40.45+6.45+18.97%
    RCIIND.BO
    63.95+8.90+16.17%
    MRPL.BO
    24.00+3.10+14.83%
    NELCAST.BO
  • Price % Losers
    Price % Losers
    NamePriceChange% Chg
    24.25-6.00-19.83%
    BMAL.BO
    13.26-2.24-14.45%
    ZYLOG.BO
    30.15-4.05-11.84%
    DRDATSONS.BO
    19.55-2.45-11.14%
    MARAL.BO
    121.50-13.50-10.00%
    POKARNA.BO
  •  
    Recent Quotes
    Symbol Price Change % ChgChart 
    Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
    You need to enable your browser cookies to view your most recent quotes.
  • Recent Quotes News

    •  
      Sign-in to view quotes in your portfolios.