World Politics Journal
April 21, 2015
The Chinese economy, the largest in the world in purchasing power terms, grew 7 per cent in the first quarter of 2015, compared with the same period a year earlier, according to the country’s National Bureau of Statistics. That was the slowest quarterly pace of growth since the depth of the global financial crisis in early 2009.
The 10 trillion dollars economy expanded 7.4 per cent in 2014, the slowest annual rate of growth since 1990, when the country faced international sanctions in the wake of the 1989 Tiananmen Square massacre.
The Chinese government is trying to rebalance the economy – moving away from the economy’s reliance on credit-fuelled fixed-asset investment towards domestic consumption and services. The International Monetary Fund (IMF) forecasts that growth in GDP would be 6.8 per cent this year and 6.5 per cent in 2016. India, which is forecast by the IMF to grow by 7.5 per cent in both 2015 and 2016, would outperform China in growth for the first time since 1999. Last month, the government cut its growth target to around 7 per cent for 2015, down from around 7.5 per cent in 2014.
These predicted growth rates are well below the double-digit average rate a year that China enjoyed for three decades, starting in the late 1970’s until 2010, probably the longest such a spell of rapid economic expansion in the history of mankind.
Industrial output rose 5.6 per cent in the three months through March from a year earlier. Fixed-asset investment grew 13.5 per cent, while retail sales, a gauge of consumption, rose 10.2 per cent year-on-year.
China’s total debt – including government, households and corporate – has risen to more than 250 per cent of gross domestic product, up from about 100 per cent of gross domestic product six years ago. Credits, which mostly were given to property developers, boosted the economy during the global financial crisis of 2008/2009. But, on the other side, the credit binge of recent years has saddled businesses, households and government with a heavy debt repayment burden (central government debt is low, but debt levels among local governments are high).
The People’s Bank of China (the central bank) cut its benchmark interest rates twice since November in an effort to spur investment, which now accounts for 50 per cent of economic output, one of the highest investment-to-GDP ratios in the world. Banks’ required reserve ratio (RRR), a level of cash commercial banks must park with the central bank, was cut by 1 percentage point last week to 18.5 per cent, a move aimed at freeing up cash and, therefore stimulating bank lending to businesses. However, despite all these efforts, China’s indebted companies remain reluctant to take on new risks.
The RRR reduction and cuts in interest rates added to an earlier stimulus of easing of home purchases rules.
The inventory of unsold homes is at a record high at the moment. In March, the People’s Bank of China cut the minimum downpayment on the second-home purchase to 40 per cent, down from 60 per cent in most cities and 70 per cent in Beijing and Shanghai in a bid to stimulate the property market, which accounts for nearly a quarter of China’s gross domestic product when related industries such as sales are included, a higher proportion than in Ireland and Spain at the height of their property bubbles.
Consumer price inflation came in at 1.4 per cent in March from a year earlier, the same rate as in February. That was well below the government’s target of around 3 per cent, partly as a result of the falling costs of commodities such as oil, iron ore, copper. Last month, producer pricesdeflated for 37th consecutive month.
The fall in commodity prices – which has hit commodity exporters such as Australia, Brazil, Russia and South Africa – as well as strong demand from the United States led to a record 60 billion dollars trade surplus in January and February. However, China’s export slumped 15 per cent in March from a year earlier, while imports fell 12.7 per cent, compared with the same month last year. March’s trade surplus was at 3.1 billion dollars. The government targets a 6 per cent trade growth in 2015.
