The Chinese growth story - Look back and way ahead…..

The Chinese economy made headlines last week when updated data by the IMF reflected that the Chinese economy ranked number one in terms of Purchasing Power Parity. Historically, the now ‘emerging nations’ had dominated the global GDP scene. The onset of the industrial revolution was the watershed moment for the now ‘advanced economies’. US in particular was most successful in harnessing disproportionate gains from this paradigm shift and emerging as a world leader in terms of GDP. The recent decade witnessed ‘catching up’ by the emerging economies with China as the strongest player. In terms of per capita income however the Chinese economy has a long way to go – currently ranking 93^rd in the world (out of 199 countries).

The image has been sourced from the article published by: The Economist.

The last couple of decades witnessed China move ahead exploiting the idea of export fueled growth supported by cheap labor costs and declining transportation costs. Consequently, exports soared from 16% of GDP in mid-nineties to ~27% in 2008. One of the major consequences of higher exports was large accumulation savings and eventually translating into dollar denominated debt. As of July 2014, China accounts for 21.09% of the $5.1 trillion dollars of US debt owned by foreign governments.

The accumulation of dollar denominated debt played its controversial part in currency manipulation whereby Chinese exports maintain competitive advantage despite rising demand. In the recent past the Chinese government has faced criticism owing to maintaining an undervalued Chinese Yuan.

Post the crisis however, the growth story slowed down as we know with current GDP forecast being somewhere between 7.1 and 7.3%, as opposed to >10% growth in 2007. The export share of GDP however continues to remain stable at about ~26.4%.

The image has been sourced from article from Forbes magazine.

Despite recording strongest GDP growth numbers among the BRICs nations (Brazil: 0.3% Russia: 0.2%, India:  5.6%) the growth estimate is modest and indicative of the slowest year on year expansion since 2009.The slowdown has mostly been triggered by sluggish movement in the property and real estate department. The Chinese government has also started focusing attention on much needed infrastructure development accompanied with loosening monetary policy and stimulating domestic demand. This is particularly well timed since economic activity in the rest of the world particularly the Euro is witnessing sluggish recovery.

At this juncture, it is important for the Chinese economy to focus on productivity gains to sustain longer term growth as much of the GDP expansion that the country witnessed has been attributed to larger employment of labor and capital. Thus, underscoring the importance of infrastructure investment and development.

The major short term challenges ahead if the Chinese economy comprise of transitioning from export led growth to greater emphasis on stimulating domestic demand as incomes rise. Environmental factors also contribute to the short term slump as shift to a clean iron ore and coal technology is time consuming. Finally, political scenario in Beijing calls for a much needed re-vamp and move away from excessive state and bureaucratic intervention.

The IMF points out that despite of these short run concerns which most likely will lead to a temporary deceleration, the Chinese economy is on a robust long term growth trajectory.

So what are your thoughts?

The content for the blog has been sourced using:

U.S. National Debt Clock October 2014 , China offers hint of growth prospects, Germany expects more bad news , China Economic Forecast 2014 - 2015: Rocky Growth , When giants slow down , Unproductive production , China’s back , RECENT DEVELOPMENTS, PROSPECTS, AND POLICY PRIORITIES