http://www.nytimes.com/2015/02/05/business/international/china-moves-to-free-up-money-in-its-economy.html?_r=0
Last year, China's GDP growth was 7.4%. That was its lowest level since 1990. Real estate and industry have been two sectors that have been hit exceptionally hard. In an attempt to stimulate growth, the People's Bank of China enacted a policy that reduces the reserve requirement of Chinese banks. This should increase lending, and it will be especially helpful to the two aforementioned industries. The People's Bank of China lowered interest rates in November of last year. They are attempting to spur growth in a clearly decelerating climate. The article also noted that there are dramatic spending increases during the Lunar New Year. That partially explains the timing of the decision, but the underlying fundamentals of the economy remain unchanged. Expansionary policies have been implemented in a number of countries, so this problem is not isolated in China. Although, it does appear that the People's Bank of China will be active in the coming months.
This is a very interesting issue. First, Krugman has noted the issues facing the Chinese. Without improvements in consumer spending and agile policy changes, China could be headed for a recession. Additionally, this could heat up the currency debate. A decrease in the value of the renminbi would make Chinese exports more attractive. This would increase net exports and GDP, ceteris paribus. What do you think?
6 comments:
I'm in a democratization class right now, and we were just discussing this the other day. We were especially talking about the effect this could have on attitudes in the labor force and how unions (the state union) will be affected. If there's a large reduction in construction demand but increase in investment for consumers, what do you think will happen?
I think China should focus more on increasing domestic demand and activity than depreciating yuan. Though a depreciated yuan would increase foreign exports but then that will make China almost entirely dependent on foreigners to improve its GDP.
China, as a country has relative abundance of labor, its development largely depends on the trade surplus. So I don't agree with Shah's opinion. In my view, what China needs to do now is to develop education in favor of country transformation.
I think it's also important to compare the United States' 4.57% growth rate in 2013.
Hannah, I think that your comment about construction is spot on. The Chinese economy, if it wants to grow at high rates, will need to be agile in a changing climate. I feel as if this will be a cyclic problem. I believe that Chinese consumption and investment will be an important driver in the coming years, and construction will experience lagged growth. China needs to initiate a strong transition before it will be able to see the high growth rates in which it is accustomed to having.
Emily Julius did point out a fairly meaningful comparison. Also, China's 2012 and 2013 GDP growth rates were also "only" at around 7.7%. While the rate of growth may be decreasing, they still possess a rapidly growing economy; perhaps they're hitting a bit of a plateau. I agree with Hannah and Austin on the construction and would also like to throw in this: there simply isn't a lot of space in the cities anymore, which is where most of the construction happens. Also of note: from 2008 to 2009, there was almost a 5% drop in GDP and I would imagine a large drop in construction demand as well. These last 3 years, GDP growth has been relatively stable, with a ~3% drop 2012. Correlation? What was the major construction then?
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