Chinese Economy 2019

In 1978, after the rule of Mao Zedong, China undertook a lot of reforms for the economy. These reforms have had substantial positive effects on the Chinese economy. From 1978 till 2000, China’s double-digit growth can absolutely be attributed to the reforms. But after 2000, China’s exponential growth carried forward by its accession to the World Trade Organisation (WTO) in 2001. China capitalised this induction to the organisation as well as it could. It made use of the cheap abundant labour to expand its manufacturing capacity. Thanks to this remarkable growth trajectory, China stopped being a part of the low-income countries in 2006.

China’s infrastructure development is unmatched for. China has the world’s largest network of motorways and high-speed rail networks. It has as much coal power as the coal power of the rest of the world combined. China’s expenditure on building roads and rail projects and laying cables in two months is what India can manage in a year. 

But even the Dragon faces problems. China has been a part of a Trade War with the US and its infrastructure development is growing at a slow rate. Debts are also piling up in China and Unemployment is also increasing. 

CURRENT PROBLEMS FACED BY THE CHINESE

At the end of each year, the leaders of China meet to decide the policy for the next year.  So when the meeting took place this year, the attitudes of the leaders had changed. They did not share the same confidence as they did at the same meeting in 2017. In 2017, all the leaders exuded confidence that China is the driver of the global economy. But in 2018, their confidence had dropped. They said that they have to focus on two things. One, containing unemployment, and to end the Trade War. 

Unemployment has been on the rise in China for some time now. Let us take the example of Foxconn, the manufacturer of Apple in China. Due to the disappointing sales of iPhones, Foxconn has stopped hiring. In the iPhone city of Zhengzhou, employees in the factories are losing their jobs. Apart from Apple products, Foxconn also makes washing machines, vacuum cleaners, etc. but, people already have these devices and they last for long also, so their demand has fallen now. The official unemployment figure is at 5%, but that is never a good guide as China measures unemployment only in urban areas and does not take into account the millions of migrant workers, which form the bedrock of their labour force. China has focused on controlling the situation as this year is the 30thanniversary of the Tiananmen Square Massacre, which reminds people of social and economic grievances. 

Another problem faced by China is of the mounting NPAs. As of now, nearly 5.6 trillion yuan has been non-performing. But when a crisis hits the economy, it brings with it many innovative ways of making money. This has been realised by a lot of investors. Many investors now have started buying these NPAs and they hope to put a little bit of work on it for restructuring and get it back on track. If this works, it will be beneficial, but even if they are not able to revive the loans, they can have the collateral originally offered on the loan, which is mostly a property. Bain Capital, one of the world’s largest investors in alternative assets has bought 3 bad loan portfolios worth 650 million dollars. As the amount of the stressed assets in China is huge, and given how desperate China is to get rid of it, they sell these loans to the investors at a knock-off price.

China’s growing debt has also affected its infrastructure development. It has slowed down after growing at a double-digit pace for three decades in order to curb the increasing debt. 

TRADE WAR

China has been in a Trade War with the US for some time now. When this Trade War started, there were many voices that said that there are no losers or winners in a Trade War, both sides get hurt. Even China might have thought of that when it decided to take US head on. But, some months down the line, China realised that with its huge amount of forex reserves, and an economy in which the trade sector plays a very important role, it has much more to lose in this War of Tariffs than the US. The Chinese economy has taken some bruises due to which it is ready to make some concessions. There was a lot of optimism about the ending of this war when the leaders of both the countries met after the G20 Summit in Argentina. China is ready to make some changes which might make Mr. Trump happy. These concessions involve restarting the purchase of American soybeans. It has also decided to cut tariffs on auto imports. But all these concessions will just mean coming back to the pre-Trade War situation. This time, the US has made it clear that they need some deep-rooted changes in the economy. 

Due to this, China has decided to make some industrial policy changes. Firstly, China has reduced the noise on its “Made in China 2025” project. This project aimed to make China the manufacturing superpower. The policy makers have also called it vague. Even the Global Times, China’s state-owned paper, is calling for a new plan. Secondly, China is starting to promote foreign competition. It earlier used to give large subsidies to the state-owned companies. This used to irritate foreign companies. China has now decided to make a level playing field for all companies and is cutting down, preferring its state-owned companies. 

China is living up to its promise as Tesla will be the first foreign carmaker to have a wholly owned manufacturing facility in China. Exxon Mobil will be the first petrochemical company to open a plant in China. 

However, the biggest challenge to this optimism was the arrest of Huawei’s Chief Financial Officer, Mrs. Meng Wanzhou by Canadian officials. Canada arrested her on behalf of the Americans. Americans have reasons to believe that she is selling technological items to Iran despite US sanctions. In response to this, China arrested two Canadian citizens. One of them being a former diplomat. 

In conclusion, I would like to say that this year will be difficult for China. But some changes in its policies and its attitude might go a long way in getting the Chinese economy back on track. 

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