The highs and lows of China’s economy

The highs and lows of China’s economy

China’s policies kept its economy stagnant, underdeveloped, centrally managed, enormously inefficient, and isolated from the rest of the world before the start of economic reforms and trade liberalisation about 40 years ago. But, since its opening up to the foreign trade and investment and implementation of freemarket reforms in 1979, it has been among the world’s fastest-growing economies, with the real annual gross domestic product (GDP) growth averaging 9.5 per cent through 2018, which according to the World Bank was the “fastest sustained expansion by such a huge economy in history.”

China has quadrupled its average GDP every eight years and lifted an estimated 800 million people out of poverty. The country has even surpassed the United States as the world’s largest economy, manufacturer, goods dealer, and holder of foreign exchange reserves (on a purchasing power parity basis). As a result, China has become one of the most important trading partners of America and is the largest merchandise trading partner, largest import source, and third-largest export market of the United States. China is the largest foreign holder of the treasury bonds of the United States, which further helps pay the federal debt and keep interest rates low in the United States.

The economy of China has matured, and its real GDP growth has slowed dramatically, from 14.2% in 2007 to 6.6 per cent in 2018, with the International Monetary Fund (IMF) projecting growth of 5.5 per cent by 2024. Slower economic growth has been accepted by the Chinese government, which has even dubbed it the “new normal” and acknowledged the need for China to adopt a new growth model that relies less on fixed investment and exports and more on private consumption, services, and innovation to drive economic growth. Such reforms are required for China to avoid falling into the “middle-income trap,” which occurs when countries reach a given economic level but cannot adopt new sources
of development, such as innovation, and thus results in significantly declined economic growth rates.

According to HSBC, China has never been this inexpensive in comparison to India, which has increased its position in the world’s second-largest market from ‘neutral’ to ‘overweight.’ HSBC has joined a spate of other brokerages, including UBS, Nomura, and Jefferies, in increasing their exposure to China, citing diminishing obstacles and attractive values.

Before the November 15 virtual summit between US President Joe Biden and his Chinese counterpart Chinese President Xi Jinping, Chinese markets were down. The clean technology ecosystem was hit hard by Elon Musk’s Tesla stock sales since electric vehicles, solar, and wind power were all down, as were the semiconductors.

Despite having extraordinarily huge overall market capitalizations by international standards, China’s stock markets are still relatively young and play a smaller role than in the US. Since equity finance may be a substantial component in economic growth, China benefits greatly from continued market expansion. Giving foreign investors more access is a step towards developing the country’s financial markets, but the key challenge will be to overcome investor scepticism.

Hong Kong media has reported that The Beijing Stock Exchange, which launched trading on November 15, has seen the trading volume getting lower and lower. By November 23, the one-day trading of the Beijing Stock Exchange was only one-third of the amount left, a loss of about 67% from the transaction amount as compared to 15th.

On November 22, in response to the new downward pressure on the Chinese economy, Premier Li Keqiang convened a meeting of local officials in Shanghai. At the same time, the General Office of the State Council of the Communist Party of China issued a document calling for greater efforts to help small and medium-sized enterprises and encourage local governments to arrange relief funds. A few days ago, the International Monetary Fund (IMF) released its annual report on the Chinese economy and pointed out that China’s economy ” downside risks are increasing.” (Courtesy The Economic Times)

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