Author`s name Dmitry Sudakov

Chinese dragon chokes on money

Chinese dragon chokes on money. 46441.jpegThe Chinese economy is gradually lowering the rate of its growth. By the end of last year, Chinese GDP was at 8.2 percent. Against the backdrop of global recession, it looks impressive, but local circumstances are such that the delay associated with a fall in global demand could result in serious problems and become a real bomb for the global market.

In fact, China's economy is transitioning into a fundamentally new situation. The last 30 years it has grown by an average of ten percent a year. However, the drop in global demand was not the only thing that affected China. In the last year the growth rate of industrial production that was 13.9 percent in the republic has decreased. Analysts predict a further slowdown. According to the forecast of J.P. Morgan, the country's GDP in the first quarter of this year will be only 7.2 percent compared with the previous quarter

The major foreign trade partners of China are the EU, U.S. and Japan. These regions are also expected to stagnate or show minimal growth, which directly influences the loading of production capacities and the dynamics of the Chinese economy.

During the 2008 crisis, when Western economies fell into recession, Beijing began a program to stimulate its own economy and domestic demand with the volume of four trillion Yuan ($586 billion). The state-owned banks increased their lending by 9.6 trillion Yuan (5.4 trillion dollars). It noticeably boosted the growth, which in the crisis first quarter of 2009 was 9.2 percent.

Distribution of money has caused inflationary growth, moreover, the Chinese government in the framework of domestic demand raised the minimum wage. In turn, this has reduced the competitiveness of the Chinese economy, the main growth factor of which was cheap labor.

Beijing has long recognized the trend observed by experts where the production facilities are getting transferred from China to the neighboring countries where labor is cheaper. Now the country's most important competitive advantage is melting before our eyes, as even cheaper workers have been found in Asia. In the second half of 2011 in major markets - EU, U.S. and Japan - the share of Chinese products has decreased by 1, 1.3, and 0.6 percentage points, respectively.

Then the Chinese authorities have decided to tighten things up to avoid further inflating market bubbles and rising bad debts spread on the balance sheets of the most actively growing regions. According to the Audit Office of China, the amount of local debt has reached 10.7 trillion Yuan (1.7 trillion dollars).

According to official Chinese sources, inflation last year was higher than forecasted. If in the beginning of the year it was expected to reach four percent, by the end of the year it was at 5.4 percent.

China reached the natural limits of growth in the chosen model of industrialization. Accelerating the economy is too dangerous and monetary tools should be applied very carefully. In order to support lending in November of last year, the central bank has lowered the country's rate of reserve requirements by 0.5 percentage points.

The strong flow of labor in the industrial area will dry up, as that many hands will not be required in the situation of shrinking demand.

Last week, the State Statistical Office of China has reported that for the first time in history the number of urban residents exceeded the rural population and made up 51.3 percent of Chinese citizens, or 690.8 million. Urbanization will bring the country percentage points of GDP growth due to the loaded construction industry, building millions of square meters of urban housing and traditionally pulling along other sectors. This will allow for some more time to delay the fall of the Colossus: China, with its belated industrialization, has not yet formulated any answers to the global challenges.

Quite naturally, the volume of direct investments in the Chinese economy is dropping. According to official statistics, in December of last year, foreign direct investment in China fell to 12.24 billion dollars. This is 12.7 percent lower than in the comparable period of last year.

Boris Yaremenko


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