Economic

China Economic Analysis

The economic factors that drive China include the structural reform of the Five-Year Plan, true GDP and growth rates, economic policies, trade relations, prices and availability of oil and other natural resources, and urbanization.

Shanghai - High Growth - 20 Million People
Shanghai – High Growth – 20 Million People
China - New Car Flood
New Car Flood

Economic Framework

The Tier 2 categories for Economics are GDP Growth and Debt/GDP.  The Tier 3 categories for GDP Growth are the economic policies of the Chinese government and the growth rates of the other large economies, such as the US and the EU.  The Tier 3 categories for Debt/GDP include the economic sectors, such as manufacturing and services, and natural resources, such as oil and natural gas.

ChinaEconomicFramework2

Industrial Overcapacity

Industrial overcapacity has proven hard to cut. This round of manufacturing overcapacity is more extensive, serious and protracted than usual. While painstaking cuts are taking place in some sectors, new capacity is being added in others, sometimes outpacing the rate of reduction. Overall, the situation remains challenging. The continuing weakness in the prices of industrial products suggests that the problem lies in the lack of systemic reform rather than sluggish demand. Simply put, the very sectors suffering from overcapacity still attract an enormous amount of resources.

Job Creation

And finally, the positive situation of job creation cannot mask the latent problems. While last year’s target of 10 million new jobs was easily surpassed, several problems remain. One, many migrant workers are employed in irregular businesses in the cities, and their rights are not sufficiently protected. Two, some manufacturing enterprises are not operating at full capacity and do not want to fire workers due to the difficulty of recruiting new ones, resulting in the problem of underemployment. Three, the more relaxed business registration requirements that took effect last March led to an explosion of new businesses. Although the smaller ones among them, including many mom-and-pop stores, are not doing much business, they are still counted as having created new jobs. And four, in a languishing manufacturing sector where employees hop from one job to another, the employment figures may be bloated because the same employee may be counted twice or even thrice.

Deflation

Fifth, deflationary risks are lurking around the corner. As of February, the prices of industrial products have been dropping for 36 straight months, breaking the record of a 31-month slump during the Asian financial crisis. While overcapacity has certainly contributed to this, a large part of it stems from the weak commodity prices in international markets. Econometric models have established that the declining international prices of crude oil, iron ore, nonferrous metals, and farm products in 2014 knocked off 1.3 percentage points from China’s producer price index (PPI) – accounting for 68 percent of the drop – and moderated the rise of the consumer price index (CPI) by 0.6 percent. New business models, most notably e-commerce, are another contributing factor to lower prices. The picture is further complicated by the fluctuations of asset prices resulting from the influx of capital into the stock market and by the increasing role of the service sector and the steadily rising prices of services. 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