China: between paper tiger and soaring dragon

Today we summarize the long-term trends of China’s economy and the transformations at  work. These highlights are more structural than cyclical, and portray the pattern of Chinese growth, its sustainability and the challenges for the coming years.

The size of the Chinese economy put into perspective
China may be the world’s second largest economy, but measured against the size of its population it is almost the hundredth largest.

The drivers of Chinese economic growth China may be one of the world’s leading exporters, but international trade’s contribution to the country’s economic growth is only very small compared to that from investments and consumption.

Will the economic growth model last when faced with new realities? China’s economy may have grown spectacularly over the last three decades, and its economic growth model must change and slow down. However, China has to deal with the challenges associated with a dwindling workforce, at a time when its infrastructure and physical capital requirements remain high.

Our views: many challenges but many assets
China is no longer the global economy’s workshop for low-cost, low-quality goods which rely on an abundant supply of unqualified labour. China is moving up the added-value chain towards greater productivity and more advanced technology which in the long-term will offset wage increases. Chinese competitiveness could be maintained by the shift in its exports sector towards more added value and more advanced technologies.

China’s transition to a consumer society, which would rebalance its growth model and provide a solution to global imbalances, will not be completed overnight. The growth model, based on investments to meet the infrastructure and physical capital needs, and associated with urbanisation, is far from exhausted. China remains a country that is undergoing a transition and has a chronic need for commodities.

Liberalisation in the financial sector with a view to ensure better capital allocation will not immediately lead to an end of capital control in spite of Yuan growing internationalisation. China’s appetite for capital is still great. However, it has to be used sparingly at a time when the many dividends from the reforms of the three previous decades dwindle. The Chinese savings ratio must decrease and be routed towards transforming the means of production to meet domestic needs, thus ceasing to fund investments of foreign assets.

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