Over the past two decades, China has been experiencing tremendouseconomic growth because of two prime reasons expanded exports andimprovement in real estate (Bosworth and Collins 201). In the late80’s urbanization led to the concentration of human resources inmajor urban centers. Urban centers grew because of the development inthe manufacturing industry. Manufacturers took advantage of theoversupply of labor to make more goods at a lower cost. As a result,China emerged as a leading exporter of manufactured goods owing tothe cheap labor in the country. Investment in real estate also had apositive impact on the economy of the country. However, over the pastfew years, the economy of China has been experiencing a major slowdown. In 2015 alone, the economic growth in China dropped to 7%. Thediscussion about Chinese economy will explore the reasons behind theeconomic slowdown in the country and the government’s efforts insolving the problem.
High National Debt and Inflation
During the global recession in 2008, China accumulated high debts inorder to remain afloat (Singh 3). The total of national and householddebts rose by a record 260%. The Chinese government made most of itsborrowing from the International Monetary Fund and other countriesthat were not experiencing a recess. The supplementary budget wasborrowedfrom the Chinese public in the form of treasury bonds andtreasury bills.
The households borrowed from local banks in order to advance theirdevelopment agenda. While other countries were facing massiveeconomic setbacks, the Chinese economy was able to remain stableowing to the massive debt. China was doing well economically to theextent that other economies in the Western world looked up to Chinafor a bail out. The money generated from the debts was used indeveloping the manufacturing industry and real estate.
Few years after the massive borrowing, the burden of repaying theloans trickled down to the households and the sectors that held theeconomy intact. The real estate sector, one of the pillars of theChinese economy, was the worst hit. The effects of a soaringinternational debt led to the inflation of real estate units. Piecesof property that were accessible to the growing middle class were nowavailable to the rich only. For the first time ever in 2014, China’sinventory of unsold homes stood at an all-time high. The sector thatwas accounting for 15% of China’s economic growth was nowexperiencing a massive slowdown (Magnier 4). To add salt to theinjury, the number of real estate startups hit an all-time low in2015. The declining real estate sector has taken its toll on theChinese economy by retarding growth.
The Chinese economic stimulus Program
During the recession of 2008, the Chinese government invested inreal estate and infrastructure, in what was dubbed the Chineseeconomic stimulus program (Naughton10). The Chinese governmentresorted to one of the largest fixed asset investment plan in theworld in order to cushion the country’s economy from the globalrecession.
The government invested in housing units and state-ownedmanufacturing firms. Local governments also invested ininfrastructure in order to advance their economies. Since most of thebanks in China belong to the state, the federal government orderedall the banks to issue loans at low interest rates. Manufacturers andreal estate developers took advantage of this opportunity to producemore products and housing units respectively. China dominated theworld in terms of manufactured exports. Meanwhile, the real estatesector was making a kill because developers were able to obtain cheaploans and consequently, sell their units at affordable prices.
The Chinese economic stimulus program led to the overproduction ofgoods in the manufacturing and real estate sector (Morrison 493).Suddenly, the supply of Chinese manufactured products flooded theinternational market and subsequently led to the fall in theirdemand. The exports that the country so relied on became a whiteelephant. On the other hand, the trickledown effect of the ChineseGovernment loan repayment plan took a toll on real estate developers.The price of houses went up when the government increased lendinginterest rates in a move aimed at repaying the massive national debt.
The government also learnt that there was a massive misallocation offunds meant for infrastructural development. After local governmentstook loans for development expenditure with the aim of creatingemployment opportunities, some governments invested in the wrongprojects.
What the Chinese Government has done to accelerate economic growth
When the Chinese prime Minister realized the local governments werespending an enormous amount of money on non-sustainableinfrastructural projects, it decided to shrink the budgetaryallocations advanced towards the same institutions. The principleidea behind this move was to reduce wastage on government loans thatwould be repaid later with a bigger interest.
Although the move was in good faith, it did not work because it ledto unemployment. Part of the reason for the Chinese economic stimulusplan was to invest in infrastructure in order to reduce the number ofunemployed people. It therefore follows that when the federalgovernment cut down on infrastructure spending, many people fellunder the unemployed bracket. In any economy where a significantproportion of the labor force is unemployed, achieving economicgrowth poses a steep hill to climb.
The government also increased the interest rates for loans advancedto real estate developers (Morrison 289). This decision aimed atincreasing the amount of government revenue in order to repay China’sinternational debt. The increased interest rates had a negativeimpact on the growth of the Chinese economy. The price of housingunits skyrocketed immediately the government announced an increase inloan interests. For the first time in the history of China, theinventory of unsold houses went up by 15%. The number of real estatestartups also went down significantly. A sector that was responsiblefor China’s growth was now in jeopardy. Currently, the contributionof the real estate sector to the Chinese economic growth stands at 7%with economists projecting a further decline. Since the Chineseeconomy has always depended on the real estate sector for her growth,now they should brace themselves for harder times ahead because thesector is declining at an alarming rate.
Since Xi Jin Ping took over as the leader of China, he has sincetried to convert the economy to be more stable and consumer driven.China’s focus is to elevate the service sector in order to go backto her former ways of economic growth. Meanwhile, the government hasput a cap on fixed asset development and addiction on loans by theprivate sector. It is in the same spirit that China has increased herinvestment on the tourism sector. The most recent addition touristhotspot to China is the glass bridge (Cai and Yung 13). The stepseems to be working but the economists’ project that consumerismcannot achieve the same economic acceleration as fixed assets didabout two decades ago.
The government is also relying on the stock market to mitigate theeconomic slowdown. The huge stock rally in 2014 saw the stock marketrise by 25% (Magnier 2). However, unlike other markets, China isrelying on her asset market to drive the economy instead of the otherway round. As some economists put it, the move is just aestheticbecause sooner or later the stock market will collapse. Instead, theasset market should be an indication of the current economy.
The current steps taken by the Chinese government do not seem to putthe situation under control. For instance, in 2015 China’s exportsdropped by 24%. Over the last fiscal year, the Chinese economy hasgrown by a paltry 7%. Unlike the other communist regimes, the currentgovernment in China is not so keen on reaccelerating economic growth.The government is asking people to get used to the idea of aneconomic slowdown because apparently, the growth of the Chineseeconomy has reached its peak.
In conclusion, the primary reason behind the economic slowdown inChina is the massive borrowing by the government and the privatesector. Currently, China’s debt stands at 260% of its annualproduction. The collapse of the manufacturing industry and the realestate sector has been instrumental in China’s economic slowdown.The government has taken several step to salvage the situationincluding increasing loan interest rates, investing in the serviceindustry, and rallying the Chinese stock market. These steps do notseem to be working because the Chinese economy is still experiencingminimal growth.
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