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China's Economy Is On The Path To Recovery

China's PPI is performing positively for the first time since 2012, but it may be too early to celebrate

17Oct

Being the second largest economy in the world means carrying a heavy weight on the shoulders. China's rapid economic growth over the last few decades has largely been due to the booming manufacturing sector, the country's exports policy, and the continuously growing population. There were times when average year-on-year growth was at a minimum of 10% - a figure other countries can only dream about. But, after all, China’s economic slowdown was inevitable. Factors including the financial crisis of 2008 and the country’s changed plans for its economic direction resulted in the slowdown, which consequently affected the rest of the world. But at present, for the first time in five years, the situation has finally started stabilizing.

China's economy had long been built on its manufacturing sector. Rapid growth was built on the sheer amount of factories and the fast growing population, which was capable of maintaining and supporting this growth, along with China's exports initiatives. Once the government had introduced the one child policy and the majority of the nation was no longer willing to work on low wages, the growth started showing the signs of stagnation. The government needed to make a radical decision by making the economy domestically driven rather than to continue focusing on export, even if it meant a short-term slowdown in growth.

It's difficult to name a country that wasn't affected by the financial crisis of 2008. If China's economy at that time would have shrunk, the global situation would have been even more devastating. The country attempted to handle it with spending $586 billion for stimulation, but ended in a credit binge. According to the Economist, the total debt, including the government, corporate, and household sectors skyrocketed to nearly 250% of the country's GDP, up 100% from its level in 2008. Even though the economy managed to survive the crisis, the cost was too high.

After a prolonged suffering period, indicators have eventually begun to stabilize. According to the National Development and Reform Commission, rail freight volume has been growing at 0.1% year-on-year, reaching 277 million tons and reversing the fall since 2013. The power production is also showing promising signs, growing at 7.8%. But, aside from conventional indicators showing growth, it looks like the new model is also working.

The technological gap between China and more developed countries is narrowing, meaning the country has opened the door to the new opportunities in the market. The new engines used towards the growth are consumer spending, R&D, and new services. These have seen consumer goods retail sales growing to 10.6% year-on-year in August, comparing to 0.4% lower indicators back in July, based on data from NBS. Regarding services and technology, online medical services and taxi hailing are booming. Moreover, after acknowledging the potential of tech innovation for the economy, China has achieved an astonishing average annual growth rate of 18.3% in R&D spending, according to UNESCO Institute for Statistics.

Finally, the PPI (producer price index) that measures the average change in selling prices by domestic producers of goods and services rose 0.1% in September, after performing negatively since 2012, according to Bloomberg. The stabilization can be explained by the increasing domestic demand and the recovery of global commodity prices. This means that the economic environment has every chance to continue recovering further.

However, despite promising signs, China still has to monitor the bubble existing in the housing market. After continuously rising prices in China's overbuilt housing market had also contributed to the economy's stagnation, the government is now in a position where it needs to urgently come up with a strategy before the bubble bursts. To control prices without harming the economy is a tough challenge that China needs to learn how to overcome.

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