7 things to know about China’s economy

Given the extraordinary impact China’s economic growth has on the rest of the world, it is perhaps not surprising that speculation about the country’s future is so intense and so constant.

China had a turbulent year in 2015 and a difficult start to 2016. Here are seven things that will shape the direction of the economy both in the short and long term.

1. It’s still growing

This might sound like an obvious point, but with so much consternation about China’s slowdown, it is easy to forget that the economy is still outperforming most of the world.

The IMF expects to see healthy GDP growth even as the economy restructures. And it is worth remembering that China’s growth in 2015 was equal to the size of the entire economy of Switzerland.

2. The restructuring is painful but necessary

China is making the transition from an external demand-driven economy to a domestic demand-driven one.

The IMF says the rebalancing from manufacturing and investment to services and consumption is vital for the economy, despite the slower pace of growth in the short term.

The changes obviously affect the rest of the world, particularly neighbouring countries in Asia. Emerging economies in the region that are more dependent on investment and manufacturing are likely to lose out, while those that supply China’s consumers are likely to be the winners as the rebalancing beds in.

3. There’s going to be more pressure on the yuan

When cash poured out of China in the early part of this year, many thought it only a matter of time before the government ran down its foreign-exchange reserves, forcing a big depreciation.

In fact, the Chinese government pushed back by intervening at home and abroad to prop up the yuan. It also moved to tighten capital controls. The move succeeded in slowing the outflow of cash and the yuan returned to where it was in early January.

The big question is whether the stability will continue when the US Federal Reserve raises interest rates again. Janet Yellen, the Fed’s chairman, said recently that a rate rise is probable in the coming months.

If that does happen, China is now in a better place to resist the pressure. Extensive capital controls remain intact and the economy is itself stronger.

4. Debt levels are coming under scrutiny

There is concern over the rapid growth in debt levels in China in the wake of the global financial crisis.

One estimate of overall debt levels from NAB Economics put debt at over 300% of GDP.

There are worries that if significant banking assets turn bad, a domestic banking crisis could be triggered.

Some analysts see parallels with Japan’s build-up of bad loans in the late 1980s, which had a lasting impact on the high-flying economy.

5. Government deficit is rising

When China’s Premier Li Keqiang announced a new five-year plan at the National People's Congress in March, it included a projected government deficit for 2016 of 2.18 trillion yuan, reaching a deficit-to-GDP ratio of 3%.

This would be the highest since the founding of the People’s Republic in 1949.

6. China has a looming demographic problem

The country's elderly population will keep growing over the next several decades, while its working-age population will keep shrinking.

Under current trends that could mean that by 2040 there could be just two workers for each person of working age in the country. As retirees increasingly outnumber working-age people, the pressure on today’s younger generation will intensify.

7. The end of the one-child policy will help

The announcement in October that China is terminating its one-child policy marks the end of a 37-year restriction that has greatly accelerated the country’s demographic ageing.

When the new, two-child generation becomes middle aged, its members will each have to support only one elderly person, on average, alleviating the economic pressure associated with such a high old-age dependency ratio.

But that will take a few decades. In the meantime, the post-1980s one-child generation will be supporting not only the elderly, but also a higher number of young people.

Although this will undoubtedly be tough for the one-child generation, an unintended side effect will be a surge in consumption, as its members will have little choice but to spend a lot more.

The shift to a two-child policy was badly needed – and not just because it will achieve the intended long-term goal of balancing the country’s demographic structure. While there are certainly pitfalls, including a difficult transition period, the policy could prove to be a boon to China’s efforts to put its economy on a more stable long-term growth path.

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