China's growth has been simply astonishing. Turning several decades back, China was not given much attention to its economic growth. It is only after when China overtook Japan as the second biggest economy behind America in February 2011, when people started to realize the might of their growing economy. China itself accounts for 10.6% of the world's total exports, and is continually increasing; its no wonder that the majority of things we buy are made in China. China is the largest exporter and the second largest importer in the world.
However, this week, official data published by the Chinese government indicates worrying news to the future of China's growth; its exports and imports have slowed for the second consecutive month. As a result, this year, China's economic growth has dropped to 7.6%, which fails to meet its annual target of 8%. A major effect of the slow in economic growth is due to the sharp decrease in exports. Exports are a component of aggregate demand, a decrease in exports will lead to a decrease in aggregate demand. Exports play a very large factor in China's economic growth, the lack of export "umph" could mean trouble for China's future economic growth. Although it may not be such a big problem in the short run, it could spell trouble in the long run when China simply cannot cope with the rising costs of its factors of production, thus the contraction of the secondary manufacturing sector, further denting China's export figures.
So what are the suspects of China's sluggish export figures? Well, for starters, and one of the main factors is the weakness in overseas economies. America and debt-ravaged Europe are key trading partners to China, but they themselves are experiencing big economic problems. America and Europe's weak economies are largely due to the lack of consumer spending while they are in their downward spiral recession. The business model illustrates that in a recession, unemployment increases and income level decreases, so there is a lack of demand for imports from China. Even though the lesser developed India, China's biggest trading partner is still doing well, but it alone cannot prop up China's loss in exports. The second factor is the appreciation of the Chinese Yuan. Because America is still the world's no.1 economy and one of China's main trading partners, China wants to maintain a good relationship with America. Due to China's low value currency proving a thorn in America's competitive international trade and balance of payments deficit, America has constantly pestered China about re-valuating their currency. In order to maintain a good relationship with America, China eventually gave up to the political pressures from not only America , but other countries as well and appreciated the Yuan. The appreciation of the Yuan increased the price of exports, so other countries wouldn't be able to afford as much goods from China, hence the fall in exported goods. And lets not forget, the downside to this is that Chinese tourists (who have literally taken over Tsim Sha Tsui for all I can think of), are able to take advantage of Hong Kong's pegged currency with America, stimulating demand and creating inflation.
*The Mainland invasion: Mainland Chinese people queuing outside Louis Vuitton, Canton Road, Tsim Sha Tsui.
This brings us on to the next factor, inflation. Inflation is defined as the continuous and sustained increase in the general price level. Economic growth is desirable in every economy, especially China, because it is one of the macroeconomic objectives the government wants to achieve when he is in the office. Economic growth brings about more jobs (lower unemployment), increase in income, increase in the economy's output, and high levels of inflation. Actually hyperinflation in this case. Inflation causes domestic prices to rise, which reduces domestic supply, therefore causing an increase in production costs. Next, the increase in production costs means that exports are more expensive, reducing foreign demand, ultimately reducing exports. There are two types of inflation: demand pull inflation and cost push inflation. As both of their names suggest, demand pull inflation is inflation due to the rise in demand and cost push inflation is inflation due to the rise in production costs. Demand pull inflation is because the Chinese people became extremely wealthy due to the economic growth, hence they will be more willing and able to purchase goods and services. Aggregate demand increases and and the output of the economy increases. Meanwhile, cost push inflation is due to the increase in wages of labour and supply-side shocks. For example, wage inflation rose by 20% in 2011 of factory workers, and food prices rose by 18.2% on average due to snowstorms and in the long run, the desertification. The Gobi Desert, located in Northwestern China, has been increasing at an alarming rate over the past few years; currently, 3600km sq. of grassland are overtaken every year, affecting the agricultural industry heavily. If demand pull and cost push inflation were not to occur simultaneously, that would not be too problematic, however, it is becoming a huge problem in China. It would appear if China's secondary sector is starting to deteriorate. Of course, as a country becomes more developed and people become more wealthy, the supply of factory workers will decline rapidly as more people desire higher pay jobs in offices. The reality, is that China may be heading towards the tertiary sector. Although it represents that China is heading towards economic stabilization and permanently establishing its place as a first-world country, after some analysis, it is hard to see China thrive as a tertiary sector economy.
Firstly, China's poor education system in poor areas. Although Asians, especially Chinese people, are heavily stereotyped as extremely smart (which is statistically true, Asians on average outperform other children on the SATs), poor education is ravaging the poorer areas of China. As the Chinese secondary manufacturing sector is deteriorating, the education is going to limit the jobs available to them. Linking to the previous point, income inequality. When China was still poor, the first place the government developed was the coastal cities before the inland cities. As we can see from the graph, the east of China are full of coastal cities, meaning that there are many ports. Ports are very good for trading because majority of exported goods travel on container carriers across the world, therefore wealthy cities. As we approach China's western countries, the income gaps start to widen. If anyone has every visited Wuhan or Xi'an, the area is very poor compared to the tall skyscrapers and highways in Shanghai. Since education is poor in the western cities, the lack of jobs available to them will further widen the income gap. And thirdly, technology problems. By an international standard, China's technology is not extremely developed yet unlike America or Europe. It really says a lot when we find that China's exports are mainly manufactured goods, textiles and electronic equipment and imports are mainly machinery and high-tech equipment from Japan and America. As China delves deeper into the tertiary sector, technology will be the main growth factor rather than manufacturing. But with the relatively poor education in western China, technological development will be slow, hence slow economic growth.
With the slowing growth of China's economy, we can answer another question: "Will America bounce back from their dire economic situation?" Its a question that has been pondering the minds of many economists; unfortunately, not many are very optimistic. Why? Well, their debt currently stands at $1.6 Trillion USD, with $1169.6 billion USD borrowed from China, who owns approximately 20.8% of all foreign-owned US Treasury securities. Also, their continually disappointing balance of payments deficit is further enhancing the problem, with slow growth in the second quarter this year. Hopefully, with China's sluggish export figures expected this financial year, things may look up for US made goods.
Unfortunately, the problem is not so simple as to be fixed by market-based solutions. Basically, trade alone cannot save America, because of two reasons. First, actually, America does not even spend that much on Chinese exported goods. In fact, "Made in China" only accounts for less than 3% of American personal expenditure! This may seem awkward since America is one of China's biggest trade partners, but it is true. Lets take a look at the chart below.
If this is the case, then this reflects that 67 percent of spending is on services rather than goods, and services are 96 percent made in America. Also, a lot of the spending on imported goods actually reflects the cost of shipping around America. For example, whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. In other words, the U.S. content of “Made in China” is about 55%. This substantial point allows us to confirm that inflation in China is not likely to have a substantial effect on the price level in the United States nor do their trade balance any good. America keeps complaining about the Yuan valued too low for the past several years, well, it seems that the Chinese officials were correct in pointing out its insignificance to America's problem.
Finally, the depletion of America's money supply. The depletion of its money supply means that the quantity of loanable funds in the economy is minimal, that means investors would not be able to borrow money and invest. As investment is part of aggregate demand, a decrease in investment leads to a decrease in the output of the economy, further worsening America's condition. As a counter solution to their debt, America has been printing a LOT of money in order to increase their money supply, hoping to create incentives to investors and increase the output of the economy and pay their creditors. Also, the printed money is sold to other economies in order to depreciate their currency, hoping to regain their competitive edge against China in terms of lower prices.
*Rolling out the money: The role of excessively printing the American Dollar is to stimulate its economy from the recession.
Although in theory, printing money has the ability to bring about beneficial changes, America's weak monetary base is significantly reducing the effect. The sudden short term increase in the money supply is only good for short term investments, and it is American's that are purchasing their own investments, hence the income flow is extremely bad. Investment and consumption is largely down to the consumer confidence, with confidence at an all time low in the current economic environment, it seems printing money may not be the best solution after all. Also, printing money will induce inflation, because the amount of money in the economy increases, so people have higher disposable incomes. Since the interest rate is not so low, people will rather spend money than save, creating consumption and high levels of inflation. And finally, the government is not able to use the printed money to pay bonds because it is not actually real money.
Short term investments take us back to the cause of the Asian financial crisis. Back in the 1990's, when Asian economies are still developing, American investors invest in their land and begin fast growing development. Exports made up a large percentage of the Asian countries' income. After they made a lot of money and America recovered from a recession in the early 1990's, majority of the investors left the Asian market simultaneously since the U.S. became a more attractive investment destination relative to Southeast Asia, which had been attracting hot money flows through high short-term interest rates, and raised the value of the U.S. dollar. Ultimately, the Asian market collapsed and caused a financial contagion. In 2007, American's also did the same, but this time, they did it to themselves. The Lehman Brother's bankruptcy sprang from exactly the same problem. America should face the cruel reality; short term increases in money supply are weak market-based solutions, it requires interventionist policies to fix the issue.
From the above assumptions, we can conclusively deduce that China's economic growth is getting exhausted is a mix of internal and external factors, with the internal factors making up majority of the problem. China's economic growth is also starting to stagnate with the weak demand from foreign countries, and may eventually turn into a tertiary sector economy. Furthermore, it does not seem America is getting back on track for awhile, since they "screwed" themselves up big-time, and there is nowhere to hide.
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