Will China Experience a Prolonged Period of Slower Growth?

China's greatest asset to growth was its cheap manufacturing base that drew investment and interest in low cost alternatives. Globalization is stripping China of this advantage as other nations find their own competitive ground. China will need to adjust its economic strategy to help it find sustainable growth that doesn't rely heavily on foreign capital accumulation. Changing their investment policies and encouraging long-term solutions will be more helpful than short-term strategies in the next phase of China's economic life.

China has been known as a great place to produce products because of a business friendly government, lower labor costs, and less environmental restrictions. This cheaper cost alternatives encouraged foreign companies to outsource simple manufacturing of parts to Chinese companies. This create a net influx of foreign dollars that fuel growth over the past couple of decades.

The country's production capacity was based on its ability to partner with outside companies seeking to shave costs. As Chinese industries learned new skills and abilities they developed many of their own products based upon existing product models. A few industries developed advanced models of products but this is still not the mainstream much of China's manufacturing sector.

Now that countries like the U.S. have achieved cost parity due to high technology and productivity improvements the benefits of outsourcing to China have lessened. Therefore, there is downward investment pressure that limits the amount of capital available to Chinese companies. The percentage of companies that have developed independent income streams has improved.

Without the innovative process that comes from a highly skilled and educated workforce Chinese growth is likely to be muted as nations find alternative places to seek resources. This doesn't mean that there is a wholesale disinterest but that such contracts are not as lucrative as in the past and alternative opportunities such as India, U.S. and Eastern Europe are viable options for production.

Think of how the free market works on a macro scale. China went through major economic reforms in 1978 that liberalized and privatized a number of state businesses. Like a hole in the middle of the ocean the capital rushed in and sparked an era of growth capitalizing on a cheap labor supply. It was a nation hungry and ripe for investment. As that hole filled up and costs increased many of the advantages are muted.

China of tomorrow will not grow as fast as it did in the past as alternative investment locations are found and manufacturing parity occurs with other nations. Chinese labor productivity has gained but is running to its limit without mass educational investment that can improve on innovation and technological production. Poor policies that favored pro-Chinese knowledge accumulation at the expense of foreign companies have raised a skeptics eyes to alternative countries with better patent protections.

With an interest rate of around 5% they can reduce that rate to encourage internal growth and development. They may also consider additional infrastructure improvements that connect regions and lower transactional costs. Revamping education to ensure more scientific minds and skilled labor are created can further help in the long run. Changing government policy to open their economy, ensure free and fair transference of knowledge, and focus their investments in high development areas.

The Chinese Tiger has not been netted yet but will need to consider additional reforms that encourage higher levels of growth. Telecommunications, lower shipping costs, and cross-border partnerships are offering cost-quality alternatives to Chinese investment. By reaching out with partners in countries like the U.S. and finding collaborative methods of mutual development with American companies the Chinese companies can further extend their reach.  

As World's Largest Economy Does China Gain New Advantages? Should We be Worried?

For the first time in decades the U.S. is no longer the largest economy in the world. Despite industry experts throwing up red flags for years the inevitable happened. According to new data by the IMF the total output of goods and services by China is $17.6 trillion versus $17.4 trillion for the U.S. This leaves experts scratching their heads and wondering how this could happen and what it means for the future. Should we be worried?

Resource Advantages:

With China accounting for 16.5% of the world economy in terms of real Purchasing Power Parity (PPP) and the U.S. at 16.3% of PPP it means that China has a little more leverage in their treaties and purchasing behavior. They will be able to obtain and receive resources at a slightly lower rate than the U.S. giving them an economic advantage.

The advantage they have in obtaining cheaper resources for their manufacturing can be sufficient when systematically applied across multiple industries year-after-year. A few cents on every dollar means products can be produced a little cheaper and growth can be fueled at a slightly lower cost. Pennies can add up over millions of transactions.

Treaties:

When a country has more economic muscle they will also find that they can negotiate and enact more advantageous treaties than other nations. The power of the dollar,  or in this case the Chinese Yuan Renminbi, changes the fundamentals of the terms. Countries seeking growth will latch onto and make deals with powerful countries that they wouldn't have done otherwise. 

An Axis of Political Power:

China is not a stand alone nation that developed its power in isolation. It is intimately connected to other Asian countries and nations throughout the world. Country leaders look toward China for direction in fiscal, social, governmental, and military affairs. Being the biggest kid in the school yard offers a further reach for influence beyond willful intent. Nations looking for alternatives will find an ally in China. 

Should We be Worried?

America is making a reemergence unseen in the past few decades. As other economies are slowing the U.S. is improving. Exports are increasing and hiring is picking up. The U.S. has nearly reached cost parity in manufacturing with China. Mammoth budgeting problems in the country are starting to be looked at and analyzed for an effective solution. It is possible that a close race of leader and follower swapping positions in an all out sprint with China will emerge for some time. 

Where We Should Improve

To capitalize on the growth and improve on opportunities for the next generation it is important for the U.S. to fix problems and dysfunction where and when they occur. Improvements could be sought in educational reform; systematic law enforcement policies that foster people's capabilities; better management of budgets/debt to lower interest costs that could be better spent somewhere else; a rational economic policy that focuses on exports (i.e. hubs, innovation and jobs); responsive government that better serves the needs of the populace vs. special interests; higher technology/functionality of the military that lowers costs and enhances capabilities to combat amoebic groups; social justice and eradication of racism/religious bigotry to ensure full economic engagement and alignment to national interests; and better treaty making that strengthens U.S. manufacturing and knowledge development.

Should we be worried? That depends if you trust that people can put down their petty differences and move into collective action. The U.S. faces difficult challenges in today's world but these are surmountable challenges that require a little forethought and elbow grease. Political gridlock and dysfunction should give way to higher levels of enlightenment that creates environments where both business and people can accomplish their goals for the collective benefit of all. As a nation, we may have forgotten the spirit of what it means to be American and the core values we all believe in. It will be these values, if refreshed, that can lead the country to higher levels of performance.

https://www.imf.org/external/pubs/ft/weo/2014/02/weodata/index.aspx

China Stimulates Economy to Keep Deflation at Bay

Experts predicted the Chinese economy to slow down for the last five years but it never happened-until now. Instead, the economy continued to grow and develop moving from copying technology to inventing some of their own. As the world’s No. 2 economy it has recently recognized that significant slowing in Asia and Europe may be hampering its own growth and it is taking precautionary measures to prop up its position. 

In an attempt to support development and investment it slashed interest rates at the time when American’s have weaned themselves off easy money policies. By injecting credit into their financial system they hope that their banks will lend more money and encourage higher levels of investment. The interest rate on the one-year loan has been reduced to 5.6% while the rate of pay on a one-year savings rate is now 2.75%. 

A low interest and saving rate combination incentivizes borrowing money for growth while discouraging the hoarding of cash by more profitable businesses. Through keeping the money flowing in and out of large banks it sparks higher levels of economic activity. It is believed that lower lending and borrowing rates will spark higher levels of investments. 

China’s economy has been growing through cheaper production costs and higher levels of investment. As the world experiences a slowdown and major nations are stimulating their economies China has decided to jump onboard.  Only the U.S. is projected to keep growing. 

With a growth rate of 7.3% and a decline in housing value the Chinese economy slowed. It is still an impressive number and the Chinese sought to weather into more sustainable growth pattern but a global slowdown has them on edge. China must continue to export at significant levels or risk moving into a deflationary position.

Is China’s at Risk for Deflation?

For the past two decades China has been growing at a remarkable pace year after year shocking economists and rewriting economic theory. It appears that the Bull Run has just about come to an end. According to the National Bureau of Statistics in Beijing the factory-gate prices fell for the 32^nd month in October. Likewise, consumer prices were also stagnant. Some economists are arguing low inflation, low capacity engagement, and high inventories may lead to deflation. 

The Chinese government is debating infusing some of its own capital into the economy in much the same way as the U.S. and Europe. The methodology may be somewhat unique as expanding production without significant household consumption or willing international buyers can be difficult. China’s economy could be experiencing the first signs of “burn out” as consumers across Europe tighten their belts.

As prices and products become cheaper there is some risk of deflation. Deflation is seen as a very destructive force that impacts the ability of the economy to maintain upward trajectory. Such things as debt become extremely difficult to service as money becomes worth more and requires much more money to pay back loans. 

Inflation can be caused when the supply of goods goes up but the amount of money does not go up to match it. This means that money is in demand and can purchase more products. This normally would be a good thing but it creates risks for investors who would rather sit on cash then invest in a deflating market, it encourages consumers to wait until products are cheaper, and it makes hording of money more likely-economic activity declines.

At present it doesn’t appear that China is concerned about deflation based upon its relatively unchanged economic policy. That risk does still loom and even though it is not common in history it has been known to cause economic hardship and recessions in those countries that experience it. It is always possible China could be in for slower growth and a bumpy ride over the next few years.  The Bull Run may have just hit a wall.