World Economy

China Walks a Tight Rope

China Walks a Tight RopeChina Walks a Tight Rope

In a battle against declining economic outcomes, China is attempting to regain a semblance of control by changing existing policies and halting pessimistic statements in the media. The task is overwhelming and endless, as new measures appear to have little effect in the face of declining growth, capital flight, and rising anxiety. Still, Beijing is fighting a downturn on several key fronts.

First, fiscal and monetary policy has been deployed since declining economic activity settled in during 2013. Deficit spending has been ongoing, and is expected to rise in 2016 from 2.3% of GDP in 2015. Fiscal stimulus has been used for some time, loosening restrictions on purchasing real estate and financing public infrastructure. Monetary stimulus through cuts to the reserve requirement ration and direct liquidity injections has increased funds available for lending, but at present Beijing now walks a tight rope between improving economic conditions and causing fears of currency devaluation, Sara Hsu wrote for The Diplomat.

Additional policies have attempted to stop the bleeding in the stock market and capital account. Stock market policies were implemented in the second half of 2015 to limit the rapid withdrawal of funds. A more stringent stock circuit breaker mechanism was implemented to halt trading activity if the market declines by over 7%, but after this tripped markets twice in one week, it was suspended.

Regulation to curb capital flight has been implemented in the insurance sector, as the State Administration of Foreign Exchange capped purchases of insurance products overseas at $5,000 per transaction. Mainland Chinese residents had been purchasing insurance in Hong Kong averaging $50,000 in order to shield themselves from further RMB depreciation.

However, capital flight continues through both recorded and unrecorded (“hot money”) transactions. The latter is reflected in a surge in the errors and omissions entry in the balance of payments. China is depleting its foreign currency reserves to combat such outflows, and some analysts are concerned that reserves will be reduced to a critical level in a matter of months.

  Pressure Rises

If the economy cannot be easily swayed, the media can. Media discussions about economic conditions are at present closely monitored, and journalists have been jailed for publishing reports that depict economic and financial events negatively. A new law, going into effect on March 10, will require online media publishers to obtain approval before operating online.

Foreign companies, including those in joint ventures, have been banned from producing digital content. Information on China’s economy is increasingly controlled. Notably, this month, the People’s Bank of China omitted data on financial institutions’ foreign exchange holdings, which might expose the scale of state interventions to bolster the RMB. This has left observers nervous about the true state of the economy.

  Sharing Economy Worth $298b

From ride-hailing business to online auctioneers, the sharing economy platforms in China have created a market worth 1.95 trillion yuan ($298 billion) in 2015, Xinhua quoted an official report released on Sunday.

There are 50 million sharing business providers in China and they have more than 500 million consumers, according to a report by National Information Center.

The sharing economy generating revenue of 1.95 trillion yuan satisfies a variety of needs in daily life and business.

In addition to taxi-hailing apps such as Didi, product, knowledge and service-based providers have mushroomed on the Internet, Yang Yixin, deputy secretary general of the China Internet Association told the media.

Zhang Xinhong with the National Information Center’s Information Research Department said China’s sharing economy would grow at an annual rate of 40% in the next five years, and would take up more than 10% of China’s gross domestic product by 2020.

The report forecasts that in the next decade, five to ten firms with similar value and influence as Didi will establish themselves in the sharing economy.