5 Issues with China’s Growth

As China enters its new phase of slower growth, it needs to cope with several things

1. Drop in investments into China
2. Declining producer prices
3. Rising wages
4. Rising corporate debts
5. Shifting from export-led economy to consumption-led economy

1) China’s declining growth rate would result in less investments (local or foreign) pumping into its economy. Currently, investment rates in China is close to 45% of its GDP. However, as its growth rate starts to decline, such levels of capital investments would no longer make economic sense.

2) Overcapacity and overproduction has led to widespread decline in producer prices. Companies are struggling with lower revenue and slower turnover. Global demand for China’s goods are declining as a result of low global economic growth.

3) The average worker’s wage has doubled since 2004 and is expected to continue rising. This increase in expense has resulted in several factories in China to close down and relocate to cheaper countries like Indonesia or India. Those factories that remain in China face difficulty finding cheap labour to produce cheap goods. This undermines China’s competitiveness and also squeeze their factories of its profit margins..

For more details on point 2 & 3, you can check out the video below:

4) China’s public firms have seen their accounts receivable ballooned to US$590 billion since 2014. This was a result of point 2 and 3. This partly contributed to China’s swelling stock of credit: US$30 trillion as of 2015. Straits Times reported that corporate bankruptcies might be 20% this year after corporate insolvency rose by 25% in 2015.

5) Alibaba founder Jack Ma once said that China’s slowing growth is not actually a bad thing but is a shift towards a more sustainable growth model, one that is led by consumption instead of exports.

Base on World Bank’s data, from 2011-2015, household consumption is an average 36.5% of China's GDP. This figure is expected to rise as China consumers are expected to increase their spending by 10% each year until 2020 according to a McKinsey report.

What is dangerous however, is China’s transition from export-led to consumption-led economy and how global markets perceive the risks involved in its transformation.

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