Economic and Financial Market Update: The Short And Long Term China Story

Summary:

  • The Chinese economy has had a remarkable run over the past 25 years;
  • And most likely that positive run will continue for a few more years;
  • But the Chinese Government faces some significant economic challenges;
  • How it handles those challenges will have a significant impact on the global economic and political environment over the next couple of decades.

The Chinese economy was amongst the top performers in 2020. And the forecast is that 2021 will be a strong year. China still has the same cyclical economic problems as the rest of the world (but not as large). The jobs market is weaker than prior to COVID. And service sectors are struggling. 

Most analysts expect strong Chinese economic growth over the next few years, albeit down on the eye-popping numbers seen for much of the past couple of decades. But China faces a number of significant economic challenges. Debt is too high, there is a need to evolve to a more environmentally-friendly economy and it has an aging population.

These problems are the same ones faced by OECD countries (including Australia). Except the problems faced by China are more extreme. Debt is a lot higher relative to income for its current stage of economy growth. China has an environmental problem. And thanks to its one-child policy, it has one of the most significant aging problems in the world. How China deals with those challenges will have a significant impact on the global economic and political environment over the next two decades.

Current state of the Chinese Economy

The Chinese economy was amongst the top performers in 2020. And the forecast is that 2021 will be a strong year. The IMF expects Chinese GDP to increase by a touch over 8% in 2021 (after being one of the few major economies to actually grow last year). The manufacturing and construction sectors grew strongly. Export growth held up, helped by robust demand for COVID personal protective equipment that China dominates in producing.

Another piece of good news for China is that it did not need to fire every last policy bullet to support economic growth. Interest rates are low, but are comfortably above zero. The central bank did not buy a mountain of government bonds. There has been substantial fiscal support. But government debt has not had to reach the nose-bleed territory of most other developed countries (Australia and New Zealand are two exceptions). China still has the same cyclical economic problems as the rest of the world (but not as large). The jobs market is weaker than prior to COVID. And service sectors are struggling.

Most analysts expect strong Chinese economic growth over the next few years, albeit down on the eye-popping numbers seen for much of the past couple of decades. But China faces a number of significant economic challenges. Debt is too high, there is a need to evolve to a more environmentally-friendly economy and it has an aging population.

These problems are the same ones faced by OECD countries (including Australia). Except the problems faced by China are more extreme. Debt is a lot higher relative to income for its current stage of economy growth. China has an acknowledged environmental problem. And thanks to its one-child policy, it has one of the most significant aging problems in the world.

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To read my full update, click here.

 

We live in interesting times!

Regards,

Peter Munckton - Chief Economist