How is the Chinese Economy Trending? Great Economic Potential Still Seen for China

China’s role in the global economy is becoming ever larger. But the Middle Kingdom also faces serious economic problems at home. Gunnar Lang, the director of a new economic survey on China instituted by ZEW and Fudan University, explains China’s current economic situation.

Gunnar Lang is the deputy head of the ZEW research department International Finance and Financial Management. His research concentrates on financial market regulation, business financing, and real estate markets. In addition, he works on third-party funded projects organized by the European Commission, finance ministries, businesses and other organisations. He is responsible for the ZEW Financial Market Test China, the China Economic Panel as well as the ZEW–PwC economic barometer China.

Together with Fudan University, ZEW has initiated the China Economic Panel (CEP), a monthly survey of Chinese economic data. Why has ZEW turned its attention to the Chinese economy?

China has caught up to the United States as one of the world’s main engines of growth. At the same time, the country is struggling with falling growth rates and greater overall volatility. The China Economic Panel is designed to be an early indicator of important developments in China’s economy. Our partnership with Fudan University ensures that the survey contains assessments from experts with an insider understanding of the country’s economic situation.

To put the brakes on sinking growth, the Chinese government is reversing course on economy policy. One of its long-term strategies is to put less emphasis on exports and stimulate domestic consumption. Will this strategy prove successful?

China has enormous long-term demand potential by virtue of its large domestic market. Wages and individual assets have risen sharply in recent years, but domestic consumption is less than in other countries with similar levels of economic development. Nevertheless, consumer behaviour will eventually fall into line. The current government reform measures are aimed at improving the quality of goods produced by domestic companies.

Wages are rising in China’s industrial centres. Some branches such as textiles and shoes are already beginning to migrate to other regions and in some cases to other countries, where labour costs are lower. What does this mean for the Chinese economy in general?

Due to increasing unit labour costs in the coastal regions, companies will relocate further inland, creating jobs there. In view of China’s intended objectives this tendency makes sense. The government’s current five-year plan heightens the vertical range of manufacture in the value chain and fosters the development of western regions. At the same time, industrial zones are being erected in China to attract specialists and high-tech services industries. The Liangjiang region is one example. This developing industrial zone is the size of Berlin and Munich together and is already home to one of the largest cloud-computing centres in the world.

Chinese banks have obviously taken on more than they can handle in their efforts to finance state-run companies, and are in danger of collapsing under the weight of their debt. Will China experience a financial crisis with international consequences?

Though a collapse of the financial system in China is very unlikely, credit levels are growing rapidly, and rates of growth like these are considered to be indicative of pending economic crisis. In the US credit levels grew by 40% in the six years before the 2008 crisis; in China they have grown by 70% in the past six years. But China is different in two respects. Domestic savings are around 50% of gross domestic product and in 2012 the central government had a debt level of 26%. Even if we factor in local government debt, the total level amounts to 45%, which is still low enough to afford China flexibility. The central government, moreover, is already taking measures to curb credit growth, to strengthen the innovation of domestic companies, and to improve opportunities for companies through new capital investments.

"China Economic Panel" (CEP)

The “China Economic Panel” (CEP) is a joint project of ZEW and Fudan University in Shanghai, China. Launched in October 2013, CEP is a monthly survey of China experts from financial, research, and economics departments of banks, insurance companies, investment companies, and industrial enterprises active in China, Germany, and on further international markets. The survey covers various business and economic data. The experts assess the current economic situation and the economic development in China on a twelve-month time horizon. Moreover, the experts assess selected financial and fundamental data on the People’s Republic, for example GDP growth, development of inflation and interest rates, stock indices, exchange rates, or real estate prices. Some of the experts provide point forecasts, some provide trend forecasts.