The unsustainable growth model in China has led to an increase in the population in recent years, yet the country is still facing a severe population problem. As of the 2012 census, China had about one billion people, a growth rate of just 0.5 percent.
Compared to the 1950s, the population growth rate decreased dramatically. The country’s fertility rate has fallen to 1.3 children per woman, facing a significant decline in the working-age population.
Over the past year, China’s GDP has decreased significantly. Producer prices have fallen, and various indicators of economic activity have weakened. These data suggest that China has lost its growth momentum, although consumption to GDP has risen slightly. Similarly, the share of the service sector in the economy continues to increase. However, there are several risks associated with the growth model. If the unsustainable growth model in China is followed for a long time, it could have devastating effects on the economy.
Challenges faced by Chinese Government
The Chinese government has faced the dual challenge of increasing domestic consumption and generating higher employment growth to keep social stability. This approach has increased investment and private consumption throughout the past decade, but weak employment growth and falling labor income have weakened social strength.
As a result, the government is trying to channel more bank credit into the services sector, where it can generate higher jobs and increase consumption. The unsustainable growth model in China is a problem that cannot be ignored.
China High Debt Level
The current unsustainable growth model in China is a perfect example. The country’s high debt levels, which account for almost half of its total GDP, are a symptom of the unbalanced growth model. Furthermore, the government is rapidly approaching 80% of its GDP. The high debt level is likely to lead to a significant fall in its exchange rate and an increased risk of defaults.
Huang suggests that instead of pursuing a policy that focuses on increasing imports, the government should improve social infrastructure and strengthen domestic consumption. A more robust social safety net and expanded social infrastructure will encourage more imports. And he believes that these reforms are necessary and are the most effective way to achieve the long-term goals of the Chinese economy. It is time to consider how this model can benefit the people of China.
The second key component of the sustainable growth strategy in China is its rapidly changing transportation model. One of the largest globally, its high-speed rail system is a shining example of this new urban planning model. China is also leading the way in adopting electric vehicles. Despite this, it has plans to build at least 250 eco-cities. This is a sign of its progress in adopting new technologies and embracing energy efficiency.
Unsustainable savings rate in China
In theory, the high saving rate of Chinese households could be explained by repressed interest rates. The target savings hypothesis proposes that families choose a consumption level based on their desired wealth-to-income ratio. But the actual deposit rates in China have been meager, despite GDP growth of 10 percent. This has sparked the concern that China is headed for a severe economic implosion.
But China’s overdependence on investment hasn’t always meant that it’s in trouble. Since its economic reforms began in the late 1970s, the country has suffered through the Second Sino-Japanese War, Maoism, and civil war. It’s also underinvested in manufacturing capacity and infrastructure, and most workers absorbed that investment instead of saving.
The future trajectory of savings will determine the path of China’s rebalancing. A decline in household savings will help maintain external balance, while continued high savings may result in large current account surpluses. Reducing household savings might also stimulate consumption as the new growth engine. The evolution of protection will also have implications for capital flows. Capital outflows could increase if savings rates remain high, complicating exchange rate management.
Even if China adjusts to a slower growth rate, it will also have to change its growth model to reduce debt. This means limiting GDP growth. Beijing needs to engineer adjustment sooner rather than later, and this adjustment will be relatively low-cost for social instability and global change. The IMF proposal will limit debt growth and keep China’s growth rates close to six percent. It is, however, essential to note that China is on its way to becoming a technological frontier. The downside is that China will run into growth-limiting factors that may be a decade or more away.
While corporate savings in China have fluctuated throughout history, they have been relatively stable in recent years. The growth of capital investment in China has caused the government to increase its fiscal savings. While the trend in the corporate sector of China’s economy may seem to be stable, the growth in labor costs is putting downward pressure on profitability. As labor costs in China continue to rise, companies may be forced to cut wages to keep their margins intact.
The biggest issue facing China is how to increase the amount of disposable income. The Chinese government must improve the quality of work for workers and raise wages faster than productivity growth. Revaluation of the currency will reduce the subsidy on production and increase the proportion of households’ total income. If the economy cannot raise its saving rate, the country will be heading toward an economic implosion. Several factors will need to be addressed to avoid a crisis of this scale.
Need for exports to revive growth
The Need for exports to revive growth in China is evident in many indicators. According to the Trade Map, the country exported goods worth US$2.49 trillion last year. The top export destination for China is the U.S., which accounts for more than 20 percent of China’s total exports. Other top destinations include Japan, Hong Kong, South Korea, and Vietnam. These markets account for a combined 40 percent of China’s exports.
In January 2020, the global economy was hit by a wave of lockdowns that affected many countries. Exports in China rebounded much more rapidly than in other regions. China’s exports increased as it met the demand for certain medical and home nesting products. The United States, meanwhile, recovered much later than the Euro Area. Meanwhile, imports grew higher than production in the Euro Area.
While the global economy is recovering, China is still heavily dependent on its exports. China must revive its growth as its largest exporter by boosting global demand. As part of its Belt and Road Initiative, China has begun massive infrastructure projects, including helping countries that have been hit by COVID-19. China must continue these projects and strengthen its relationship with the United States. Successful recovery in exports is crucial for the economy and the US-China relationship.
While China’s trade is growing again, it does not show any rebounding in the construction and real estate sectors. As a result, the Chinese government may mount new export subsidy programs to make up for the hole in the construction and real estate sectors left in the country’s GDP. Nonetheless, the Communist Party of China has abused its trade relationship with the United States for 20 years. Now, it’s time for the United States to step up efforts to prevent such abuses from occurring in the future.
Exports surged in October last year. While this was a softer than expected increase from September’s 28%, it was still higher than analysts had predicted. Imports rose to levels not seen before the pandemic, and export growth in August was even faster than the month before the outbreak. Analysts believe that stronger global demand may have spurred the robust export growth last month. It has been estimated that the Chinese economy will remain the only major economy to see positive change in 2020.
In addition to boosting the U.S. exports to China, this strategy can also create job growth. The Chinese economy is projected to grow by 8.5% annually in the next five years, and its import demand is set to soar by 10 percent. Additionally, export-related jobs are usually well-paying and pay 15 percent more than the national average. With the Chinese middle-class flying, the U.S. should make efforts to help workers who lost their jobs to foreign competition.