China’s Economic Challenges

Yu Yongding was the former president of the China Society of World Economics and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS). He recently commented on the Chinese economy and its future in the East Asia Forum. Yu Yongding highlights issues such as labor unrest, the growing housing bubble, shadow banking, rising local government debt and overcapacity as threats to sustained growth in China.

Yu Yongding lists three changes that characterise China’s “new normal”. First, high growth rates are becoming a thing of the past; future rates will likely hover around or fall short of 7 per cent. Second, the government will avoid using expansionary fiscal and monetary policy to stimulate growth as long as the growth rate remains above an unspecified lower bound, hypothesized by Yu Yongding to be 7 per cent. Third, market-oriented reforms will be implemented at the expense of growth to an extent.

The author writes that investment and exports have driven China’s economic growth over the past two decades, with China’s real estate investment being the most important since 1998, having maintained growth of around 20 per cent. The Chinese government’s increasing concern about a real estate bubble and growing unease towards skyrocketing and unaffordable housing prices led to a government clamp down has slowed real estate investment to 12.6 per cent. The reverberating effects of the slowdown in real estate investment have adversely impacted the manufacturing sector. The author proposes growth in infrastructure invest as compensation for the slowdown.

Ultimately, Yu Yongding writes that China must shift from demand-led to innovation based growth, highlighting overcapacity as the greatest obstacle in China’s economic future. The author argues that only innovation based growth will result in demand being responsive to supply. Yu Yonding concludes by predicting that China will hit its growth target of 7 per cent in 2015.

The opinions expressed in the article summary above are the opinions of the author alone and not that of Global Summitry or its staff, editors and or advisers.

 

Source
Yu, Yongding. “China faces challenges but bears beware of betting on collapse” East Asia Forum, 28 Dec. 2014. Web 9 Jan. 2015.

 
 

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