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Economy

China’s growth after slowdown

China’s growth after slowdown

Relevance:

  • GS3 ||Economy || Structure of the Indian Economy || National Income & it’s measures

Why in news?

  • The Chinese economy has grown faster than expected, but concerns over stimulus remain.

Recent developments

  • Chinese economic slowdown: China’s economic growth cooled to its slowest in 28 years in 2018. Factors include –
    • tariff war with the United States
    • tepid expansion in industrial output and
    • demand in most of its major markets weakening
    • weaker consumer spending is squeezing
    • size of China’s debt pile and the risk of bad loans.
  • Signs of a rebound: China’s economy is showing signs of a rebound.
    • According to figures released by its National Bureau of Statistics, the Chinese economy grew at 4% in the first quarter of the current year compared to the same period last year.
      • While this rate of growth is equal to the pace registered in the December quarter and faster than economists’ expectations of a 6.3% expansion, it is still slower than the growth rate of 6.8% recorded in the same period last year.
    • Retail sales and factory output also showed strong growth momentum.
    • Chinese exports reached a five-month high in March, rising 14.2% when compared to the same month last year.
    • The Chinese stock market has also been buoyed by the early signs of an economic turnaround and increased liquidity, with the CSI 300 index rising by over a third in value since the beginning of the year.

Implications

  • Positive effect of government’s efforts: The latest growth figure is seen as a sign that the Chinese government’s efforts over the last few quarters to stimulate what is the world’s second largest economy are beginning to have a positive effect.
  • Social financing: Total social financing grew by almost 40% to 8.2 trillion yuan in the first quarter of the year, pointing to a credit expansion that will boost growth in the coming quarters.
  • Exports growth: With trade tensions with the United States subsiding significantly for now, export growth may accelerate, further boosting the Chinese economy.

Need for caution

  • Risk in lending: Gross domestic product growth that is generated largely by increased lending, however, poses the risk of losing momentum once the stimulus is withdrawn.
    • Beijing, of late, has once again been prodding its banks to boost lending to public and private businesses, apart from implementing various fiscal measures to boost consumer spending.
    • This could lead to a tricky situation where businesses that resort to heavy borrowing when credit is easily available become burdened with disproportionately high amounts of debt once the economic boom cycle reverses.
    • Chinese authorities may eventually be forced to crack down on exuberant lending by banks when the economy is found to be overheating.
      • It was such a crackdown that contributed to the fall in property prices in the last few years.
      • For now, though, property prices have begun to rebound after restrictions on the real estate sector were eased lately, in an attempt to stimulate growth in the economy.
    • The Chinese government is now walking a tightrope as it attempts to keep the momentum from slowing in the short term, even as market forces try to correct imbalances within the economy.
      • Such macroeconomic policy, focused too narrowly on the short term while ignoring the long-term consequences, however, does not bode well for either the Chinese economy or the wider global economy.

Mains question

  • China’s economy is showing signs of a rebound after experiencing slowdown over the past few years. Examine the factors that led to the slowdown and its revival. Also examine the impact of China’s economic revival on the wider global economy.