Structure of the Chinese Economy
Structure of the Chinese Economy
December 10, 2014
This article has been produced by the efforts of the following team members:
Oscar Crawford-Richie – Research Assistant
Louis-Claude Perrault-Carré – Team Leader for China-Industry
According to recent projections by the International Monetary Fund (IMF), China is expected to surpass the United States as the world’s largest economy when adjusted for purchasing power parity – with a GDP of $17.6 trillion. In contrast the United States is only expected to reach about $17.4 trillion by the end of this year.[1] Furthermore, China’s economy is also growing at a rapid pace, having a growth rate of 7.7% in 2013.[2]
The most notable risk faced by the Chinese economy is the decrease in GDP growth rate – down from 10.4% in 2010 to 7.7% in 2014 – with estimation as low as 6.3% by 2019.[3] If China’s GDP growth continues to experience large drops in growth over the next decade, the entire economy could experience lower levels of employment; the private sector would face limited expansion – leading to a decrease in domestic consumption demand over the next few years.
Another major risk associated with the Chinese economy is the possibility of deflation. China’s inflation rate is currently the lowest it has been since the global recession and it appears that inflation will continue to decrease, driven mainly by the slowdown in oil and metal prices, lowering production costs.[4] Medium levels of inflation encourage consumers to spend before prices increase but if prices fall, consumers may withhold spending in the hopes that prices will continue to decline.[5] The potential decrease in consumption spending will negatively impact production firms, private industries, public industries, and it will make paying back loans more difficult as the relative price of debt increases.
Aggregate debt held by businesses, households, and the government in China has reached 250%. This has gone up by 100% since 2008.[6] While the debt is lower than many industrialized nations, it is considerably lower than other developing nations.[7] High levels of debt have the potential to deter foreign investment, making it more difficult for firms to expand operations. Payment on debts also takes away from further domestic investment, hindering growth.
In order to combat deflation and decreases in the growth rate the People’s Bank of China (PBC) has lowered interest rates in an attempt to stimulate spending.[8] China’s central bank is controlled by a Governor nominated by the Premier of State Council, approved by the National People’s Congress and appointed by the President. The Chinese government has given the PBC considerable power including the regulation of the banking sector and the implementation of monetary policy within the bounds of Chinese law.[9]
While GDP growth is decreasing it still is growing at a very high rate, much higher than most developed nations, and is expected to continue to grow faster than most industrialized nations. Furthermore, risk associated with decreasing spending should be mitigated by improved average income in China. According to the National Bureau of Statistics of China, average annual income for those employed in China has increased from 32,244 Yuan in 2009 to 46,796 Yuan in 2012.[10] This income growth will foster the perfect environment for an increase in aggregate consumption.[11] Central bank intervention should also help to stimulate demand through the cutting of interest rates.
