China is transforming to a new economic model

30 august 2016

The Analytical Center has published a new bulletin on the current trends in the global economy titled Taking the Pulse: Brazil’s Economy against the Backdrop of the Olympics. Focus on: China’s Economy - Slowing Down and a New Growth Model In it experts talk about the overall situation with special attention being paid to the economies of Brazil and China.

The Rio Olympics were held at a time of a long and very serious crisis that’s been wreaking havoc in both the politics and the economy of Brazil, the experts note. Unemployment (and until recently inflation) in the country exceeds 10% while investments in road transport cargo deliveries fell by a fourth on the pre-crisis level. Holding the Olympics, a project that involves huge government spending, at a time like this sparked numerous protests among the general public. However, the mid-2016 trends suggest that Brazil’s economic crisis has most likely already bottomed out: the rate at which industrial output is falling is slowing down, the country’s no longer on the brink of a default, financial risks, while still high, are falling and consumers are becoming more optimistic about the future.

Speaking of China’s economy, the experts note that the shift towards a new economic growth model is best seen in the structural changes in the country’s GDP: over the next two to three years household spending in China is expected to outstrip savings. This means China’s moving towards the same ratio that’s seen in most other countries, including the developed ones (for example in the US, the share of household spending is 65% while the share of savings is 20%). Slowing growth of the consumption of energy resources is one of the processes accompanying the slowing down of economic growth in China. As economic growth is losing steam in China, the structure of its exports is changing as well, with the country buying more and more processed goods. ‘China’s lightning fast economic growth over the past several decades (According to IMF estimates, China’s share in global GDP at purchasing power parity was 4.1% in 1990, 7.4% in 2000, 13.8% in 2010 and 17.1% in 2015) has resulted in the country becoming a major player in the global economy, especially in trade and investments. Having overtaken the US in terms of purchasing power GDP in 2014 (in nominal terms China’s still in second place), China’s now become the world’s largest economy at purchasing power parity,’ the experts write.

The main change now that happened in China’s economy is the rising share of consumer spending in 2011-2015, the experts believe. On the one hand, China’s a global leader in terms of industrial companies, but on the other, the price of labor is now growing very fast in the country as well. As income increases, households begin to spend and consume more. Rising production costs (due to rising labor costs) mean that the writing’s on the wall for the era of ‘cheap Chinese products’. Add to that the general difficulties that the global economy is now facing as a whole, and major changes in China’s foreign trade are inevitable: the country’s buying more and more processed goods, while its purchases of semi-finished goods and raw materials are declining.

The transition to a new economic model in China is being manifested in slower economic growth, structural changes in the economy and in rising consumption. In the future, it is expected that the level of inequality in the country will decline and its economy will become less energy intensive.

For more see the bulletin: Taking the Pulse: Brazil’s Economy against the Backdrop of the Olympics. Focus on: China’s Economy - Slowing Down and a New Growth Model  

For other issues of our bulletin on current trends in the global economy see Publications.

Photo from open sources.