China: Some points relating to the current economy, expected trends and salient features (Overall): China’s economy has grown rapidly so far this decade. Government policies have moved markedly towards allowing market forces influence economic activity. Polices covering the price determination, foreign trade, exchange rates, foreign investment, entry barriers, internal markets, the operation of state-owned enterprise and the financial system have all been changed. These reforms have boosted growth that stems, in an accounting sense, mainly from a rapid pace of capital accumulation, relying on a level of national saving that is approaching half of GDP. The policy changes have allowed a much increased role for the private sector and substantial foreign investment. Sustaining the recent pace of growth will require further reform to ensure that there is a continued improvement in the framework for the private sector, to complete the reform of the banking sector and ensure a stable macroeconomic environment. There are also a number of imbalances in the economy whose resolution would help improve growth and wellbeing. In particular, policy changes are needed to reduce the disparities between rural and urban incomes and increase the pace of urbanisation. Welfare would also be improved by further reductions in the high level of pollution.
1. Chinese companies will emerge prominently in the International market where production is key.
2. Moving away from the traditional agrarian sectors to manufacturing sectors, China is poised to move ahead confidently and make strides in taking their economy to new levels of productivity and growth.
3. China’s young population is now acquiring greater skills and has access to technical and modern education. With a higher and accelerating pace of improvement of skills sets in the nation, a better educated work force promises to be an asset for the future of China.
4. A continued pace of privatization in all sectors also promises to boost productivity levels and improve profitability at micro level.
Population: – Birth rates are dropping and therefore, fewer workers will be entering the work force in the coming years. Given the sharp drop in women of child bearing age, it is unlikely that China will be able to stem the trends in its population growth. The possibility that in 20 years, the major segment of the population will be between 40 and 60 years, this may prove to have a significant impact on consumption. China’s population is likely to peak in 2008, much earlier than predicted.
Environment: – Environmental degradation is a serious factor that has to be combated if China has to move on the right track to progress. Water is likely to be a crucial factor in the future with half the river waters having been rendered useless and polluted. – Water subsidies may be withdrawn to farmers and this might the impact the economy at large with food prices rising. This might also lead to an exodus from the countryside to urban areas thus deepening the environmental crises already surfacing in most cities. – 5 cities in China are among the ten most polluted cities in the world.
Trade: – China has already replaced USA as the major trading partner of most Asian countries. – China is embarking continuously on major investment on infrastructure and logistical support systems. The heavy spending when the cost of money is low may lead to a fallacy that there is a spurt in “demand” and such figures may lead to being considered as final.
Capital: – Investors who are offered free or cheap capital are likely to accept it despite the unpredictability of returns. – Foreign investors may not be competing with players in China itself but may be merely using China’s excess capacities.
Fiscal: – A fall in the volatility of the economy should lead to a structural fall in the savings rate and a concomitant increase in leverage. – An increase in the GDP is imminent. Fiscal policy in China has followed an extremely prudent path, keeping the level of government debt low and stable but following counter-cyclical polices when needed. Public expenditure relative to GDP is lower than in the OECD area largely owing to much less developed social transfer spending. Public spending may need some restructuring away from capital expenditure towards education and health spending. Social transfer spending also needs reform, which should build on the existing system of individual retirement accounts. Taxation has been kept low and has taken, on the whole, a pro-growth stance. But domestic corporate tax rates need to be lowered significantly as do the higher marginal tax rates on earned income. At the same time the base of the value-added tax needs to be widened partially making up for revenue losses elsewhere. Expenditure is to a greater extent decentralised than revenue, making a large part of sub-national governments dependent on transfers. There is scope to reform the inter-governmental fiscal system including bringing expenditure responsibilities at each level of government in line with financial resources and improving accountability. Finally, the budgetary system in China needs to be made more comprehensive and transparent. Financial Systems: – Improved financial intermediaries, especially through the development of a stock market, enabling increases in corporate profits to stimulate consumption rather than simply encouraging new investment. This chapter considers the changes that are needed to the financial system in China before it can adequately serve the growing private sector of the economy and provide diversified saving vehicles for individuals. Much progress has been made toward developing market oriented financial institutions and improving their internal capabilities to assess and manage risks and the stock and government bond markets have been developing rapidly. The basic institutions for an effective regulatory system have been put in place, and regulatory authorities are making good use of international standards and practices in their policies.
Going forward, financial reform involves five main and related challenges. The first is to deal with the legacy of the banking system: a very high stock of non-performing loans and low capitalisation. The second is to reform the structure of the banking system so that it can better support the real economy. The third is to further develop the capital markets and foster the growth of institutional investors. The fourth, and ultimately the most important, is to strengthen the ability of financial institutions to behave commercially and manage risks prudently, while the fifth is to continue improving the supervisory structure so that systemic risks are contained. These issues are all the more daunting given that the business environment is still evolving away from a state administered towards a market economy. (Sources: McKinsey Global Institute, Societe Generale, Cross Asset Research, Gavekal Research, Dragonomics, IMF reports on China) -
