Friday, 31 August 2012

Will the “Once beloved Dragon” continue to soar?

It has been a joyful and exciting ride for China, exceeding analysts’ expectations on economic growth for the past two decades. In retrospect, China was once considered as one of the least attractive investing regions around the globe mainly because of its rigorously centralized control over all industries and the lack of openness to the global market. However, that has been changed due to China’s tremendous endeavor to undertake constant reforms of economic development plans and absorb so called “Westernization”. 

Upon the successful achievement in somewhat decentralized government in the late 1970s, initiating its first economic reform, China was able to shift its concentrated industry from agriculture to manufacturing, taking the advantage of cheap labour to be competitive in the global market. Nonetheless, China’s incomparable competitiveness in the cheap labour has diminished due to the fact that the vast majority of offspring of unskilled parent, working in a factory, have high education and pursue the highly rewarding careers, which causes the increase in wages. Therefore, China has recently faced the challenges by industrialization that increases the cost of economic growth.

Furthermore, the cost of industrialization has widened the income gap and weakened the driving force from the reform and opening-up. This indicates that China needs to come up with a better strategy to attack the issues involved in accomplishing the practical fiscal/monetary and foreign policy.

In the case of employing the effective expansionary fiscal policy, focusing on the increase in government expenditures, the central government has to restore its credibility of infrastructure development.

“The bridge – which cost $300 million and was in use for less than a year – was at least the sixth bridge to collapse in little more than a year in China.”

According to The Economist, infrastructure projects are being used as a way of boosting the construction industry. As a result, the government has plans to build 70 new airports and expand another 100 airports by 2015, despite the fact that many existing airports are loss-making.

In addition to the challenges with fiscal policy, China has encountered the negative impact from the uncertainty in Europe and therefore decreased interest rates twice already in the first half of the year in response. This initiative has been successful in terms of maintaining low yuan to be competitive in the global market. However, there is a misleading outcome that the exports rose 1 percent year-on-year to $176.9 B in July, but plummeting from the 11.3 percent growth seen in June this year. WSJ has recently come out with some negative reports that the IMF lowered its estimates for China’s economic growth for Q3 due to the deepening Euro crisis and that they expect hard landing taking place in China, which may drive up the price in realty market at a faster rate than the wage increase.

Despite some negative outlook on China’s economic growth, there are a few positive signs. According to Financial Times, China is prepared to attract more foreign direct investments by allowing higher foreign stakes in financial markets and loosening the strict restrictions for foreign speculators to invest in property market. As well, Chinese Premier, Wen Jiabao, assured that the central government and policymakers have collectively put a lot of efforts to meet the targeted economic growth of 7.8 % for Q3 this year by cutting the required reverse ratio and easing inflation that allows more room to adjust monetary policy.

Bottom line:  

We have come to the conclusion that the challenges China is undergoing now are inevitable yet surmountable. The success for China to sustain the economic growth heavily depends on how the central government and policymakers collaborate to develop the new economic stimulus programme that focuses on fiscal policy “if” the economy continues to underperform. At a time when a Rmb4trn (US $586B) spending package to pull the economy out of a slump was introduced in 2009, China successfully managed to 1) establish and strengthen its infrastructure by approving investments undertaken by local governments and state-owned companies, 2) restrain yuan to be competitive by lowering the interest rates with precaution. Now, China is facing new challenges of 1) properly analyzing the potential local investments, 2) effectively and timely responding to the euro crisis, 3) stimulating FDIs in financial securities market.

Young G.


  1. Great article!

    1. Thank you. If you had any opinions on the subject, feel free to open up a discussion. :)

  2. It is so true that an attempt to make a rapid economic growth always results a great amt of cost!

  3. That's right. We also believe that India is undergoing the economic growth at a rate that beats analysts' estimates on it. Philippine and Indonesia are the ones catching up with China and India these days, so we are going to look into the South East Asia region and blog about it as well. Stay tuned!!