Major challenges facing China’s economy in 2015
- By Niu Li
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[By Jiao Haiyang/China.org.cn] |
Fourth, the cost of financing remains high for enterprises.
The manufacturing sectors plagued by overcapacity and the local government financing platforms have two things in common: they are insulated from interest rate fluctuations; and because they suck in massive investment, they play a big role in driving up financing costs. As a result, money is turning away from the real economy. In addition, the retrenchment in the property market and the building-up of default risks for some financial products have made financial institutions more reluctant to turn on the tap. Moreover, wealth management products, electronic financing options and the shadow banking system are siphoning off funds from the market. Although policymakers have cut short-term interest rates, this move has yet to have an impact on the capital market. Put together, these developments mean that the cost of financing remains prohibitive for many enterprises, especially private and small ones.
Fifth, deflationary risks are lurking around the corner.
As of February, the prices of industrial products have been dropping for 36 straight months, breaking the record of a 31-month slump during the Asian financial crisis. While overcapacity has certainly contributed to this, a large part of it stems from the weak commodity prices in international markets. Econometric models have established that the declining international prices of crude oil, iron ore, nonferrous metals, and farm products in 2014 knocked off 1.3 percentage points from China’s producer price index (PPI) – accounting for 68 percent of the drop – and moderated the rise of the consumer price index (CPI) by 0.6 percent. New business models, most notably e-commerce, are another contributing factor to lower prices. The picture is further complicated by the fluctuations of asset prices resulting from the influx of capital into the stock market and by the increasing role of the service sector and the steadily rising prices of services. All things considered, although deflation is not yet a reality, its risk must not be underestimated.
And finally, the positive situation of job creation cannot mask the latent problems.
While last year’s target of 10 million new jobs was easily surpassed, several problems remain. One, many migrant workers are employed in irregular businesses in the cities, and their rights are not sufficiently protected. Two, some manufacturing enterprises are not operating at full capacity and do not want to fire workers due to the difficulty of recruiting new ones, resulting in the problem of underemployment. Three, the more relaxed business registration requirements that took effect last March led to an explosion of new businesses. Although the smaller ones among them, including many mom-and-pop stores, are not doing much business, they are still counted as having created new jobs. And four, in a languishing manufacturing sector where employees hop from one job to another, the employment figures may be bloated because the same employee may be counted twice or even thrice.
The Chinese government has fully recognized these problems. In the annual work plan, it says it will secure new progress while keeping economic performance stable. More specifically, the government will:
– Adapt to and guide the “new normal” of slower growth;
– Secure a medium-to-high economic growth rate while moving the economy to a medium-to-high level by switching on the “twin engines” of mass entrepreneurship and innovation, and increased supplies of public goods and services;
– Strike a good balance between delivering stable growth, adjusting the economic structure, promoting reform and raising living standards; and
– Pursue a proactive fiscal economy and a prudent and balanced monetary policy.
It is believed that with these measures in place, the economy will register steady growth throughout the year, ensuring adequate space for structural readjustment and all-round reform in 2015.
Niu Li is the Director of the Macro-economy Studies Office at the Economic Projections Department of the State Information Center.
This post was first published at Chinausfocus.com To see the original version please visit http://www.chinausfocus.com/finance-economy/major-challenges-facing-chinas-economy-in-2015/
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