World Economy

China: Less Growth, Huge Debt, Big questions

China: Less Growth, Huge Debt, Big questionsChina: Less Growth, Huge Debt, Big questions

What’s the road like that China’s economy will be facing after more than two decades of going from strength to strength? Will that road have a soft surface, or a hard and bumpy one? This is the kind of question that economic pundits the world over have started asking themselves.

China has become the world’s second-largest economy, and a hard landing would have repercussions globally. An economic expansion of 6.9 percent to 7.1 percent as envisaged by the leadership in Beijing may seem impressive at first glance if compared to far weaker dynamics in Western economies, but only at first glance, DW reported.

That’s because an emerging economy such as China has a lot of catching up to do and simply needs higher growth rates than a highly industrialized nation like Germany in order to create many more jobs and avoid social unrest. Economists put the critical threshold at 6-8 percent of growth needed to do just that. China is running the risk of dropping out of that “stability range.”

  Well Prepared?

The Chinese leadership has penciled in lower growth and wants to restructure the economy. Instead of investing in more and more companies to produce goods for export, the focus is now on fueling domestic consumption.

For some time now, the leadership in Beijing has realized that its conventional growth model of large-scale savings and excessive investments is not really sustainable, says US economist Nouriel Roubini. But, he adds, the shift of focus is meeting with some resistance and cannot be implemented overnight.

Roubini says Chinese President Xi Jinping is bound to act against the interests of lobby groups which have profited from the higher growth rates, be it state-owned companies, regional governments, the army and also the private sector. He takes it that more far-reaching reforms will only be enacted after Xi has strengthened his own power position.

In point of fact, many envisaged reforms have been slow in taking shape. German companies have welcomed China’s new focus on domestic consumption. Alexandra Voss, who’s with the Chamber of Foreign Trade and Commerce in Beijing, says it’ll be important just how the planned reforms will be put into practice. What’s crucial, she says, is fair access to markets, less red tape and strengthening the rule of law. “The reform package is generally hailed as being positive by our members, although the details are still very vague,” Voss told DW.

Currently, the real estate market is the biggest drag on the Chinese economy. While the overall economic picture has improved somewhat since the end of September, investment in property has been going down. And so will state spending, claims Michael Spencer, chief economist of Deutsche Bank, Asia Pacific. He told Bloomberg a while ago the Chinese central bank would cut its interest rates in March and May. As for March, he’s already proven right. Officially, the March 1 rate cuts were enacted because of deflationary pressures and sinking raw materials prices.