5 insights into China’s slowing economy

A recent interview with an “authoritative insider” close to the Chinese government discusses the most pressing challenges facing the world’s second largest economy.

Source: World Economic Forum Global Competitiveness Report 2015

From an asset bubble to macroeconomic policy, here are the five key insights shaping China’s economy:

1. China’s economic slowdown is not unexpected

The fundamentals of the Chinese economy are sound, as China has the world’s highest household saving rate and maximum space for macroeconomic policy manoeuvre. At the same time, China has a resilient economic system and a predominantly institutional system. There will not be any serious problem as long as we make sure economic trends are carefully stewarded.

2. China must focus on reconstructing the economy and avoid strong stimulus

China should concentrate on reconstructing the economy, avoid concerns about growth-rate fluctuation of one or two percentage points, and under no circumstances become so anxious as to resort to strong stimulus.

3. Private investment is vital for economic growth 

The high rate of household savings is making it difficult for Chinese people to earn a sustainable property income, and a lack of capital is affecting the economy.

…whether it can transfer savings to effective investment will be the key to stable economic growth.

Stronger consumer demand requires an improved social security system and better wages. Supply side policies are also necessary in order to give consumers an effective supply of quality goods and services.

The shrinking of global and domestic aggregate demand will not be solved with a stimulus plan alone – innovation and financial reform are essential.

4. China must remain vigilant of creating an asset bubble

Attention should be paid to the growth of debt in local government and China’s highly leveraged companies.

According to the “authoritative insider”, the central government has accelerated efforts to combat overcapacity and the property market is “facing a painful destocking”. China must adapt to rapid urban growth and establish a plan for the long-term sustainable development of the real-estate market.

Source: World Economic Forum Global Competitiveness Report 2015

5. China’s macroeconomic policy needs to balance fiscal stimulation with structural reform

According to the insider, China’s macroeconomic policy in 2015 needs to focus both on the size of stimulation and the form of this investment.

Macroeconomic policy should have a certain force to achieve steady growth and ensure the economy grows within a reasonable range.
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This is not to say that we don’t want GDP (gross domestic product) – what we need is effective GDP backed by quality.

Author: José Santiago, Senior Associate, Public Engagement, World Economic Forum

Image: A Chinese national flag flutters on the Pearl River near a construction site in Guangzhou REUTERS/Alex Lee