Chinese Economic Performance in the Long-Run

Chinese Economic Performance in the Long-Run

Beginning in 1978, the Chinese economy launched its transition from a strict centrally planned economy to a far more market-based system. Though the Chinese state still retains significant control over regulation and large segments of the economy, the decision to introduce market mechanisms and open trade paved the way for China’s explosive economic growth through the 2000s and to the present day. China remains the world’s largest economy by purchasing power, until 2015, its fastest-growing. Though the United States still boasts the world’s largest GDP, China is a close second, and is set to overtake the U.S. by 2030.

What Sustains China’s Growth?

The Chinese economy is partially state-controlled and partially market-based. The government continues to plan and guide the economy, but private businesses provide much of the engine for economic growth. The upside of a partially state-run economy is the massive investment the Chinese government pumps into local and regional project. The government can also step in to bail out businesses and localities in the face of economic weakness, as most financial institutions are state-owned.

The Chinese regulatory environment is also notoriously lax; the economy has grown too rapidly for regulatory bodies to keep up. Though the resulting worker and consumer safety issues have sometimes been severe, profit margins have remained high. As a result, cheap Chinese exports dominate global markets, and China continues as the world’s largest exporter.

China’s Future Development Plans

Xi Jinping’s government revealed a major new initiative in 2013, known as the Belt and Road Project. Presented as a modern-day Silk Road, the project proposes to link Africa, Asia, and Central and Eastern Europe together through a web of land and sea routes. Ultimately, China hopes to place itself at the center of a quasi-global economy by addressing an infrastructure gap stretching across much of the region. Capital-starved economies in Eastern Africa, Asia, and the former Soviet Bloc countries have proven more than happy to accept Chinese investment pumped into the massive infrastructure project, estimated to cost between $4-8 trillion U.S. dollars.

The Belt and Road Project has buttressed a recent turn towards China among many developing economies, including some as far afield as South America. Though President Trump has recently engaged China in a trade war, renewed isolationism by the United States may help push some wavering nations into China’s arms. President Trump’s decision to pull out of the Trans-Pacific Partnership similarly American alliances is Asia, where China’s rivals had hoped to counter its rising influence.

Upsides (and Downsides)

China’s economy has slowed in recent years, and stocks have reached a four-year low, so now may be a good time to invest in Chinese businesses. More importantly for the long-term, China’s population has grown alongside the region’s, creating the largest class of consumers (especially young ones) in history. China also holds leverage against the United States, as its largest holder of foreign securities. Even one of the largest downsides of China’s massive growth over the last several decades – severe pollution and environmental destruction – now seem to provide room for global Chinese leadership, as the United States under President Trump has abdicated its leadership role in addressing climate change.

Some substantial problems remain: China’s limited spending on social welfare problems has forced its citizens to save en masse for retirement, creating a strangling force on economic growth. Inflation and public debt have also represented serious dampers on China’s economic engine. However, as China increasingly rivals the United States in global investment and influence, its impact on the global economy and world politics is only likely to increase.

Davenport Laroche is a leading shipping container investment agency based out of Hong Kong.

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