Monday, 17 August 2015

China's Current Stasis Won't Stop It From Being The World's Biggest Economy

As I predicted nearly a year ago, China's economic growth has seen a significant slow down, despite growth in the early part of the year. The main reason for its growth slow down is that China's economy relies too heavily on exporting consumable goods. China leads the way on consumable goods largely because they can produce those goods cheaper than anyone else. One reason for this is that they have a work ethic that most can't compete with - and their recent success in the past few decades has seen them go from a poor country to a middle range country, and probably eventually the world's biggest economy.

But that journey looks to have hit a stasis, and the most popular reason, stated by the Financial Times here, is "sluggish demand in developed markets". True, the recent financial instabilities have brought about some demand-side lethargy in the global market, but that lethargy hasn't had any kind of negative effect on Europe's biggest financial capital cities, so why has it on China?

I'm going to suggest the reason why China has hit this stasis is as much to do with their own internal economics as it is any demand-side sluggishness. Despite being a huge economy in terms of exports, China is still a relatively small economic power when it comes to domestic demand. Lacking citizen stability in terms of welfare, pensions and health and social services provisions - at least compared to Europe's biggest economic powerhouses - it is more difficult to drive up domestic spending, which makes China's economy vulnerable to an over-reliance on exports.

Plus, let's not forget, old communist habits die hard, and while China is capitalist in its global; expanse, it is still communist with regard to the State involvement in interest rates and other areas of the banking sector, which, as usual, is the case of too much state and not enough market.

I predict China will go on to be the world's biggest economy - but it will only do so when it engenders a domestic economy that matches its exportation economy, when it has a service-based industry that is on a par with its consumable goods economy, and when it eventually looses its State thrall and realises that competition is big driver of prosperity.