Photo: China Photos/Getty Images
As Chinese data continues to deteriorate, housing continues to show weakness and bad debts rise, some take solace in the fact that this is all part of China’s plan to rebalance its economy and cool growth.In a paper, Li Zuojun, deputy director at the Development Research centre of the State Council (DRC) writes that after 30 years of rapid growth, China is beginning to restructure. And that the economy now faces 9 major challenges.
Chinascope features excerpts from Li’s work, which we summarize here:
- Slowdown in economic growth: China’s economy is slowing and this isn’t temporary it reflects “the market’s direction”. This means that “companies will face losses to the point of bankruptcy” and the pressure on employment will rise.
- Long-term inflation: Chinese consumer price inflation has gone from 6.5 per cent in 2011, down to 2.2 per cent in June 2012. Inflation is an intermediate to long-term problem for China which means the country needs to increase its “tolerance” for and “resilience” to inflation.
- “Accumulating economic bubbles”: Years of rapid growth have led to many bubbles and now the concerns is that the bubbles will start to burst. “If the government uses a superb macro-control technique, lets the air out of the bubbles little by little without triggering an economic crisis or social unrest, and timely cultivates new economic growth and new competitive advantages so that businesses are restructured and upgraded, this would be considered a “soft landing,” and the bubbles would not burst. However, in 2013 there will be unprecedented pressure, which will warrant a high degree of vigilance and attention.”
- Challenges from rebalancing: China faces 4 major shifts the shift from external demand to domestic demand, from investment driven growth to consumer-led growth, shift from government investment to private investment, and finally from “traditional elements of production to advanced elements of production”. China needs to promote this to maintain the pace of economic growth. “Japan and Latin America have gone through this transformation, but they did not do well and fell into the “middle-income trap” or the “high-income trap.” We also face this challenge.”
- Challenge of adjustments to industries: China needs to get rid of over-production at its industries and upgrade technologies, management, and employ more skilled personnel. Moreover, the country needs to conserve energy which is a problem for central and western China that are growing rapidly. The regions hope that Beijing will compensate them but a decline in the country’s coffers mean this isn’t very likely.
- Feng Li/Getty ImagesConstraints on resources and environment are rising: Demand for energy and raw materials in China is massive. At the same time the country faces massive pressure to cut carbon dioxide emissions and protect the environment.
- Rising social costs as government revenue declines: Improvements in social development raises costs for the government, because it increases spending on pensions, health care, housing, education etc. But government revenue is falling since tax revenues from small and medium enterprises has fallen, and government income from land use is decreasing because of falling house prices.
- Weakening international environment: The global economic slowdown is likely to persist for another two or three years, and will be a blow to Chinese exports. Moreover, “the international environment for China’s overseas investments is deteriorating” because countries don’t trust the Chinese and suspect they will steal their technologies or are doing it to control their resources. Third, western countries are pushing to undermine Chinese competitiveness by calling for renminbi appreciation, which impacts the international environment for adjusting the exchange rate.
- Increased resistance to reform: Those with vested interests are against reforms in the Chinese economy. And ignorance has led to the belief that disparities between the rich and the poor for instance were brought about my market-oriented reform, which has led to many resisting more reforms now.
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