Major challenges facing China’s economy in 2015
- By Niu Li
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E-mail China.org.cn, March 19, 2015
China’s GDP reached US$10.4 trillion in 2014, crossing the US$10 trillion mark for the first time. The figure accounted for 13.4 percent of the world economy and 59.5 percent of the U.S. economy. The good news is that the structure of the economy has been improved upon, employment figures are better than expected, prices have risen only moderately, and the balance of international payments is satisfactory.
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[By Jiao Haiyang/China.org.cn] |
On the other hand, the property market faces challenges: it is still in the process of consolidation; the pace of resolving industrial overcapacity is slower than desired; local governments are saddled with debt; and the cost of financing remains high for many enterprises. Of these problems, the following six deserve special attention from policymakers:
First, the property market is still undergoing consolidation.
Given its sheer size, the length of industrial supply chains and its implication for relevant sectors, the property market is considered a key driver of the economy. For the last five years, property investment grew at an average rate of 22 percent and contributed to 1.5 percentage points of economic growth. By most accounts, housing needs in China are anywhere between 12 million and 13 million units per annum. Such needs were basically met in 2013. This led to a period of consolidation beginning in 2014, marked by the simultaneous drop of both prices and sales. If international experience and the normal pattern of the property market are any guide, this period of retrenchment may last three to five years. In other words, don’t expect the property market to thaw any time soon.
Second, industrial overcapacity has proven hard to cut.
This round of manufacturing overcapacity is more extensive, serious and protracted than usual. While painstaking cuts are taking place in some sectors, new capacity is being added in others, sometimes outpacing the rate of reduction. Overall, the situation remains challenging. The continuing weakness in the prices of industrial products suggests that the problem lies in the lack of systemic reform rather than sluggish demand. Simply put, the very sectors suffering from overcapacity still attract an enormous amount of resources and act as a damper on the emerging strategic sectors and modern services.
Third, fiscal and financial risks have been building up.
Having raised huge amounts of debts in recent years, local governments now have to start repaying them. With the slowing investment into property and manufacturing sectors, greater government investment in infrastructure construction seems to be the only way to shore up economic growth. However, the State Council, China’s cabinet, has tightened the management of local government debt, greatly restricting the flow of money into infrastructural projects. In the meantime, the risks of debt default are surfacing, putting growing strain on local government coffers and spreading risks from the real economy to the financial sector. Worse still, the abovementioned problems have a way of compounding each other, resulting in more downward pressure on the economy.
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