China’s growth rate has slowed since the double-digit rates before 2013. Its economy grew 7.7 percent in 2013, 7.3 percent in 2014, 6.9 percent in 2015, and 6.7 percent in 2016.
China fueled its former spectacular growth with massive government spending. The government owned strategically-important companies that dominated their industries. It owns the big three energy companies, PetroChina, Sinopec, and CNOOC. They are less profitable than private firms. They return only 4.9 percent on assets compared to 13.2 percent for private companies. But they allowed China to direct them to high-priority projects.
China requires several things of foreign companies who want to sell to the Chinese population. They must open factories to employ Chinese workers. They must share their technology. Chinese companies use this knowledge to make the products themselves.
The People’s Bank of China, the nation’s central bank, tightly controls the yuan to dollar value. It does this to manage the prices of exports to the United States. It wants them to be a little cheaper than those produced in America. It can achieve this because China’s cost of living is lower. By managing its exchange rate, it can take advantage of this disparity.
China’s growth has reduced poverty. Only 3.3 percent of the population lives below the poverty line, set at 2,300 yuan. China has 20 percent of the world’s population. As its people get richer, they will become bigger consumers. More companies will try to sell to this market, the largest in the world. They will tailor their products to Chinese tastes.
Growth is making China a world economic leader. China is now the world’s biggest producer of aluminum and steel. Exports rose 25 percent in 2015.
Chinese tech companies quickly became market leaders. Huawei is the world’s top cellular-equipment maker. It is quickly becoming a world leader in developing 5G technology. Lenovo is a world-class maker of personal computers. Xiami is China’s No.1 smartphone brand.
Government spending created a total debt-to-GDP ratio of 260 percent. This include government, corporate, and consumer debt. Since the state owns many corporations, it must be included. The consumer debt may have also created an asset bubble. Housing prices have skyrocketed as low interest rates fueled speculation. High growth levels have come at the cost of consumer safety. The public has protested pollution, food safety scandals, and inflation.
It also created a class of ultra-rich professionals who want more individual liberties. They primarily live in urban areas, since that’s where most of the jobs are. In 2017, almost 60 percent of the population lived in urban areas. In the 1980s, it was just 20 percent.
Local governments are charged with providing social services, but aren’t allowed to tax locally to fund them. As a result, families are forced to save because China doesn’t provide benefits for people who’ve moved from the farms to the cities to work. Interest rates have been low, so families don’t receive much return on their savings. As a result, they don’t spend much, keeping domestic demand low.
To move forward, China needs more innovative companies. These only come from entrepreneurship. State-owned companies make up 25 percent of total industrial output, down from 75 percent in 1970. However, China must do even better.
The “Made in China 2025” plan recommends advances in technology, specifically big data, aircraft engines, and clean cars. China has become a world leader in solar technology. It is cutting back on steel and coal production.
The worst risk is the ticking time bomb within the nation’s financial system. Banks are state-funded and owned. This means the government sets interest rates and approves loans. They pay low interest rates on deposits so they can lend cheaply to state-owned businesses. As a result, banks have channeled government funds into an unknown number of projects that may not be profitable.
Bank loans are nearly 30 percent of the economy. One-third of these may be the “off-balance sheet” loans that aren’t regulated. They are above the lending limits set by the central government. If interest rates rise, if growth slows too fast, if the government cuts back on stimulus, these loans will probably default. That could set off a collapse in China similar to the 2008 financial crisis in the United States.
China’s leaders now walk a fine line. They must reform to remove asset bubbles. On the other hand, as growth slows, the standard of living may fall. This could cause another revolution. People have been willing to turn over personal power to the state only in return for rapid increases in personal wealth. China’s leaders must reform the economy or it will ultimately collapse.
Leaders must take steps to boost domestic demand from its 1.37 billion people, so it can rely less on exports. It must diversify into a more market-based economy. This means relying less on state-owned, and more on privately-owned, companies to reap the rewards of a competitive environment.
One way it is doing this is by boosting investment in China’s stock market. That allows companies to rely less on debt, and more on selling stocks, to fund growth. It also helps the tech companies that are listed on the Shenzhen exchanges. China recently installed the Connect program between the mainland exchanges and the Hong Kong stock market.