2023-08-20 00:42:00
Challenges of China’s economic indicators
China’s economy
The Chinese central bank cut the main interest rate last Tuesday, the second cut in three months. The period of rapid prosperity that prevailed for years seems to be fading, and the Chinese economy is facing increasing challenges. In contrast to Western central banks, the Chinese central bank currently adopts monetary easing policies to stimulate economic activities. New credit data for last July indicate a sharp decrease from the previous month, and to levels that are the lowest since 2009. This is a strong indication of a decline in consumer and investor confidence and their tendency to wait until economic conditions improve. July’s negative economic data was not limited to a decline in credit, but rather came as a strong shock when it indicated contraction in prices and a decrease in foreign trade volumes.
The Chinese consumer cost index fell last July by 0.3 percent on an annual basis, and the producer price index (prices from factory doors or wholesale prices) declined for the same period by 4.4 percent. This data raised the concern of specialists, decision makers and global markets about the developments of the Chinese economy and the speed of its overcoming the existing challenges. Specialists are expressing growing concern about price deflation, as it pushes consumers to postpone purchase and investment decisions, which deepens the fragile economic conditions and pushes for a further decline. Japan went through a long period of price deflation, which hindered its economic growth for many years. On the other hand, many express optimism about the decline in prices in China, given that it is at middle-income levels, and has greater opportunities to stimulate growth than Japan in its years of economic stagnation.
It was expected that the Chinese economy would witness this year a period of strong recovery after the Corona crisis and the end of China’s strict policies towards the spread of the epidemic. The Chinese economy – after abandoning the strict measures – achieved reasonable growth in the first half of the year, but rates have declined in recent months. It clearly shows that there is a weakness in consumer confidence, lower consumption growth rates, strong tendencies towards hoarding, and deferring consumption and investment decisions. The problems surrounding the real estate market, which has been witnessing a bubble for several years, are among the most important factors of weak consumer confidence. The authorities sought to curb the effects of the bubble too quickly, which lowered demand and real estate prices. The decline in prices reduced the wealth of consumers, generating the so-called effect of wealth, where the decline in wealth leads to consumers’ reluctance to spend and increase savings.
The Chinese authorities rushed to stimulate the economy vigorously at the levels of central, state and local governments after the global financial crisis for several years. This has piled up the debts of local governments and state-owned enterprises to high levels. The accumulation of debt reduced the ability of these governments and institutions to borrow, which reduced their ability to establish new infrastructure projects, and reduced demand growth in general.
Foreign trade witnessed a more than expected decline, both at the level of exports and imports. China’s exports and imports fell on an annual basis by more than 10 percent last July, and the decline came as a result of weak domestic and external demand. Trade data for Asian tigers, such as South Korea, indicate a significant decline in their exports to China. On the other hand, the tension in trade relations with the United States and the sanctions it imposes, especially in the fields of technology, added more pressure on China’s foreign trade. And Chinese exports fell sharply to the United States and the European Union, more than the rest of its trading partners. On the other hand, more Western investors are showing a tendency to transfer their production chains to other countries, which will negatively affect foreign investments in China and its foreign trade.
The world is very interested in what is happening in China, as it acts as an important locomotive of global economic activity, as it is the second largest economy with a gross domestic product estimated at about $18 trillion in 2022. It is also the largest exporter in the world and the second importer. China is of particular importance to developing countries, as it is at the forefront of importers of raw materials, including oil. China is on the list of oil importers in the world with more than ten million barrels per day. The rapid growth of its consumption contributed to the stimulation of oil prices during the past years. That is why its economic developments play an important role in determining the prices of oil and other raw materials, and may be the most prominent at the global level.
Despite the many challenges facing the Chinese economy, it is expected to achieve growth this year of 5 percent, which is high by the standards of other countries, but it is low compared to China’s historical growth rates. Countries with successful economic models usually grow at high rates at the beginning of their renaissance. These rates are declining over time due to the decline in development returns from infrastructure and human development projects. After countries achieve certain levels of income, it becomes difficult to maintain high growth rates. That is why many countries enter into the so-called middle-income trap, and they need reforms and economic policies that stimulate productivity, efficiency, and technical development.
* Quoted from Al-Eqtisadiah newspaper.
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