What&#039s Wrong With Chinese Economy

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HAS CHINA REACHED THE PEAK OF THE

ROLLER COASTER?

Table of content

Executive Summary……………………………………………………………………….3

Introduction………………………………………………………………………………….4

China’s Domestic Economy………………………………………………………………4

Capital Outflow…………………………………………………………………………4

Economic Slowdown………………………………………………………………….5

Debt Crisis……………………………………………………………………………..6

Financial Market and its implications…………………………………………………….6

The Introduction of the Renminbi to the SDR…………………………………………..8

Political System……………………………………………………………………………9

Corruption………………………………………………………………………………9

Regulations and policies…………………………………………………………….10

Demographic issues……………………………………………………………………..10

Aging population………………………………………………………………………10

Executive summary

This report provides an analysis of various issues faced by China and how these in return

affect its economy. The analysis is divided into 4 main factors influencing the Chinese

economy; Domestic Economy, Financial Market, Political System and Demographic

elements. The analysis shows that the Financial Markets in the country is highly unstable,

mainly due to the control that the government has over it, making investors hesitant to invest.

The unpredictability of the highly regulated economic policies has affected its domestic

economy, forcing major capital outflow of approximately seven hundred billion dollars in

2015. The new regulations implemented by the Chinese politicians have negatively affected

the economy as well; the division of institutions who would regulate securities and currency

has only made the system unnecessarily complex. In addition to these, the analysis shows that

anti-corruption regulations have affected luxurious industries, however, they have not seem to

be effective as China’s global position in corruption descended 8 places in the wrong direction

to the 83rd place. The previous factors mentioned need to be addressed in order to motivate

investment in the country (which seems to be China’s major issue), consequently boosting

China’s economy.

Introduction

The world has seen the rise of a new power, namely China. With a population of

approximately 1.38 billion people and a gross domestic product (GDP) accounting for 15% of

the worlds’ GDP, China has managed to position itself as a leading nation in the world

economy. However, the country has been hit by several crises in the previous year, reducing

its tremendous annual GDP from 14.2% to 7.3%. Those sudden crises have led many to

wonder if China has finally reached the peak of the roller coaster. To answer this question, this

report will analyze the issues currently faced by China in 4 main factors influencing its

economy. These factors are Domestic Economy, Financial Markets, the Political System and

Demographic elements.

China’s Domestic Economy

Capital Outflows

One of China’s main economic problems has been the immense capital outflows over the past

years. More specifically, as China’s economic and political activity have become more and

more unpredictable and distrusted by western foreign investors, the trend of selling of assets

within China has become a significant problem for the Chinese economy. According to

estimations, capital outflows from China amounted to a total between $700 billion to $1

trillion in 2015, followed by another $100 billion in January 2016. (“Time To Relax Over

China’s ‘Capital Outflow Crisis'”, 2016) Furthermore, a majority (60%) of the capital outflows

of the second half of 2015 were attributed to foreign currency purchases used for private and

corporate travel, acquisitions and debt repayments. (“Time To Relax Over China’s ‘Capital

Outflow Crisis'”, 2016) In terms of acquisitions, Chinese companies spent $85.5 billion within

the first four months of 2016 in order to take over foreign competitors. (“Time To Relax Over

China’s ‘Capital Outflow Crisis'”, 2016) Although China’s government has been able to slow

down the ‘capital outflow crisis’ dramatically by enforcing new policies through the Public

Bank of China and ultimately cutting back its capital outflow in February to $28.6 billion,

Capital outflow arguably still remains a major domestic economic issue that could result in a

significant market slowdown. (“Time To Relax Over China’s ‘Capital Outflow Crisis'”, 2016)

Economic Growth Slowdown

Besides China’s immense capital outflows, its economic growth has been decreasing heavily

due to a variety of reasons. China’s gross domestic product (GDP) growth has decreased from

14.2% back in 2007 to 7.3% by 2014 (“GDP growth (annual %) | Data | Table”, 2016). Due to

the immense criticism that the GDP growth rate may be subject to unreliability and

government manipulation, it is essential to observe more reliable indicators such as the

Purchasing Manager’s Index (PMI), which reflects the economic health of the manufacturing

sector. More specifically, China’s PMI has been under 50 points for seven consecutive months

until February 2016, thus showcasing a continuous trend of contraction in manufacturing.

(“Fresh data confirms Chinese economic slowdown – BBC News”, 2016) One of the major

reasons for China’s slowing growth has been the sheer size its economy has reached by now.

More specifically, the current growth rate of 7% would actually generate more economic

output than the 14% growth back in 2007. In addition, China’s incredibly high growth in labor

force, capital and productivity have been recently slowing down as well, directly affecting

China’s economic growth (“Fresh data confirms Chinese economic slowdown – BBC News”,

2016). Another significant reason for its economic growth slowdown has been its debt crisis.

China’s current debt level is approximately 250% of its GDP, leading to a significant

repayment burden (“Why China’s economy is slowing”, 2015). Besides the reasons mentioned

earlier, the IMF claims that the recent slowdown is a deliberate attempt by the government to

avoid a ‘hard landing’ and economic contraction. Furthermore, it relates its growth slowdown

with the recent policy changes aimed at orientating its export-led economy to a consumer-led

economy (Saadi, 2016).

Debt Crisis

As mentioned in the section above, China has accumulated an immense amount of debt

including both household and corporate borrowing in order to fuel its growth and ease the

effects of the world’s financial crisis of 2008. China’s household debt has accumulated to

more than $6 trillion since 2007 and in 2015 alone, Chinese non-financial businesses have