Challenges for China

Capital suggestion

In 2015, China’s economic growth was the weakest in the past 25 years. In 2015, wealthy Chinese sent out a colossal $1 trillion. Additionally, Chinese exporters are holding billions in dollars instead of converting their export receipts to Yuan. In essence, wealthy Chinese along with exporters are exhibiting a severe lack of confidence in the exchange rate policies of the People’s Bank of China, China’s central bank.

In January 2016, the yuan settled at a five-year low. Chinese foreign exchange reserves are falling – falling fast. In 2015, China’s foreign exchange reserves plunged by a wholesome $513 billion – the first annual drop in the past 24 years. The once booming Shanghai Stock Exchange has lost half of its value whipping off 12 trillion yuan or an equivalent of $1.8 trillion.

China is implementing what it calls ‘supply-side reforms’. According to Yin Weimin, China’s minister for human resources and social security, China will be laying off 1.8 million workers in the coal and steel sectors. Reuters, the international news agency based in Canary Wharf, England, puts the figure much higher, at 5 million to 6 million, over the next couple of years. This would be the single largest layoff in history.

The actual as oppose to official debt-to-GDP ratio in China is estimated at 240 percent-and that’s alarming (in the US the debt-to-GDP ratio is around 95 percent). Of the total debt, the non-performing loan portfolio could be as high as 2 trillion Yuan or an equivalent of $300 billion-and that’s huge. According to The Economist, “China’s banks are certainly at risk from a rash of defaults” and that “China cannot escape the economic reckoning that a debt binge brings.”

According to the South China Morning Post, “China’s property bubble is bound to burst” as “property inventory in China rose to a record 6.2 billion square meters” and “the current property ownership already accounts for 90 percent of the population.”

To be certain, corruption continues to be an issue. China’s ranking in the Corruption Perception Index is 83 (Pakistan is at 117). Xi Jinping, upon his elevation to the post of general secretary of the Communist Party, announced a country-wide anti-corruption drive. The drive is now at full throttle.

In China, consumption’s share of GDP, hovering around 36 percent, has always been low (in the US, for instance, consumption’s share of GDP is close to 70 percent). Under Deng Xiaoping China went through the ‘30-year export and investment-led growth miracle’ but China’s exports and investments are now slowing down. Consequently, Chinese GDP is slowing down and the new leadership is now attempting a transformation – from an export-led economy to a consumer-led economy.

There’s massive over-capacity in steel, coal, cement and construction. The export and investment-led growth model was unsustainable and the transition from an export led economy to a consumer led economy will not be painless-unemployment, the debt overhang, devaluation fears, falling foreign exchange reserves, massive capital outflows, relocation and retraining of workers.

The transition will be painful. China would have to find new engines of growth. China would have to undertake deep rooted, long awaited financial reforms. And the Chinese leadership would have to manage a substantial increase in domestic consumption. All easier said than done.

The writer is a columnist based in Islamabad.

Email: farrukh15@hotmail.com Twitter: @saleemfarrukh