China stagflation strikes, Ratings
place a mechanism for balanced
Jugal Kishore Sharma
A. ECONOMIC OBJECTIVE AND KEY
POLICY COMMITMENTS
Economic Objective
 China’s medium and long-term
development goal is to maintain the
sustainable and healthy development of
the economy, transform the economic
development pattern, double its GDP
and per capita income for urban and
rural residents by 2020 from its 2010
level based on much more balanced,
coordinated and sustainable
development; build an innovative
economy with considerable increase of
scientific and technology's contribution
to economic growth; basically
accomplish industrialization,
significantly expand IT application,
markedly improve the quality of
urbanization, notablely modernize the
agriculture industry and effectively
construct new rural communities, put in
development among regions; further
open up the economy, significantly
enhance international competitiveness.
China will keep household incomes
growing in line with the economic
development, and achieve overall
balance of the major policy targets,
including economic growth,
employment, inflation and balance of
payments. China 's economic and social
development in 2014 is anticipated as
follows: -Keep economic growth
within a proper range. GDP is projected
to grow by around 7.5%.Efforts to
comprehensively deepen reform will
further boost the impetus and vitality of
the economy. Policies and measures
introduced earlier to stabilize the
growth will continue to take effects, to
which consumption, investment and
external demand all contribute.
Whereas,China has entered a crucial
stage of transforming its growth
pattern. The anticipated growth rate of
around 7.5% is flexible and indicative.
-Focus on quality improving and
upgrading of the economy. China will
accelerate development of modern
service industries, to continuously raise
the share of value-added by the service
sector in GDP. China will increase the
ratio of the R&D spending in
GDP,accelerate the transformation and
upgrading of traditional industries,
facilitate the healthy development of
emerging strategic industries, orderly
promote the new urbanization and more
balanced development among regions.
Energy consumption per unit of GDP
will decline by more than 3.9%.-
Maintain price stability. CPI growth
will stabilize around 3.5%. The
basically balanced aggregate supply
and demand, continuous increases of
grain output and the amply supply of
almost all products lay a solid
foundation and provide favorable
conditions for stable prices. -Giving
high priority to improving people’s
wellbeing. More than ten million new
jobs will be created in urban area this
year, with registered urban
unemployment rate below 4.6%.Urban
and rural household incomes will
increase basically in line with
economic growth.China will further
improve the social security system and
ensure equal access to basic public
services. Construction of 4.8 million
government-subsidized housing units
will be basically completed in urban
areas, and another over 7 million units
will start constructing.Comprehensive
Growth Strategy — China | 2 -
Maintaining basic balance of
international payments. Total imports
and exports will grow by 7.5% or so,
with more rapid development of trade
in services. Investment overseas will
continue to grow, while FDI will
remain stable with improved
structure.China’s economic adjustment
and reform could contribute to
continuously releasing and increasing
the growth potential, maintaining
stability and sustainability of the
growth and improving its quality,
achieving full employment and
reducing income gaps,
therefore,steadily increase household
income and consumption capacity, so
as to increase global demand on a
sustainable basis. China’s adherence to
reform and opening up, especially by
promoting trade and investment
liberalization and facilitation, will
contribute to sharing growth bonus
with other members, and achieving the
G20’s aggregate growth ambition.Key
Commitments China’s top five key
reform areas are: (1) the “new
macroeconomic policy responses” to
stabilize near-term growth, (2)
“transform the economic growth
pattern” to further boost consumption,
(3) improve “competition” to allow the
market to play the basic role and
promote private sector involvement, (4)
promote “urbanization” to support
growth and employment, (5) reform the
fiscal and financial sector. B.
ECONOMIC OUTLOOK AND
CHALLENGES TO GROWTH Key
Drivers Domestic demand continued to
be the key drivers of growth, with
consumption as the basis and
investment as the key. Domestic
demand contributes 104.4% to growth
in 2013. Consumption is the main focus
of boosting domestic demand. In 2013,
total retail sales of consumer goods
amounted to 23.78 trillion yuan,
growing by 13.1% year-on-year. In
particular, housing decoration, sales of
furniture, and sales of household
 appliances and audio & video
equipments grew by 22.1%, 21% and
14.5%, respectively, vehicle sales grew
by 13.9% to 21.98 million. Enormous
potential arose in new patterns and new
areas of consumption. Consumption on
IT products grew by 28% to 2.2 trillion
yuan, revenue of domestic tourism
grew by 15.7% to 2.6 trillion yuan, and
the turnover of e-commerce grew by
25% to 10 trillion yuan. Investment is
crucial to keep growth stable. In 2013,
total investment in fixed assets grew by
19.1% to 44.63 trillion yuan, in
particular, private investment grew by
23.1%, accounting for 63% of the total
(excluding investment by rural
households), 1.8 percentage points
higher than the previous year.China
will fare the worst if spiking inflation,
slowing growth and rising interest rates
lead to stagflation, according to the
results of a stress test of 20,000
companies conducted by credit rating
agency, S&P Global Ratings.
 Stagflation is characterized by rising
prices and slowing economic growth or
high unemployment.
 “Now that China’s growth is slowing
down, they’re taking a double hit, both
from slowdown in growth and price
pressures coming up from overseas
because some of the components are
being imported,”
As of 2019, China has the second-largest
economy in the world with a GDP of $14.3
trillion, behind the United States GDP of $21.4
trillion.1 If the economy were represented in
purchasing power parity (PPP), China edges
out America as the largest economy with a
purchasing power of more than $23.5 trillion.2
How did China go from a poor society,
devastated by World War Two and its own
civil war by the mid-20th century, to the
number two economy today? After decades of
economic stagnation and setbacks under
Communist rule, China began to open itself to
international trade and liberalize the economy
when it established diplomatic and trade
relations with the U.S. in 1979. As China's
subsequent export growth fueled the growth of
manufacturing and urbanization, China rose to
be a major global economic power over the
next four decades.3
China has faced criticism about how its
economy has been able to sustain an average
annual growth of almost 10%, though this has
slowed in the last few years, with a growth of
6% in 2019, still within China's growth targets.
Namely, the government has been accused of
manipulating the currency to keep Chinese
exports attractive and of not disciplining
companies that engage in intellectual property
theft.
**China's strong productivity growth,
spurred by the 1978 market-oriented
reforms, is the leading cause of China's
unprecedented economic performance. Despite
significant obstacles relating to the
measurement of economic variables in China,
these findings hold up after various tests for
robustness-Increases in capital goods, labor
force, technology, and human capital can all
contribute to economic growth. Economic
growth is commonly measured in terms of the
increase in aggregated market value of
additional goods and services produced, using
estimates such as GDP.**
Forty years ago, after a long period of
economic stagnation, China was not in the
world’s top eight economies. Today, thanks to
a breathtaking social and economic
transformation that began in the late 1970s,
China is on track to overtake the United States
as the world’s number one economy within a
few decades, if not sooner. By some measures,
it has already done so. We are living in what
many are now calling ‘The Chinese
Century’.China’s economy is the second-
largest in the world, behind only the United
States. But after three decades of spectacular
growth, China is now moving into a
slower growth phase – an inevitable result of its
transition from a developing economy to a
more mature, developed economy. In the
1980s, 1990s and early 2000s, China’s annual
GDP growth frequently exceeded 10 per
cent, with an estimated 2019 growth of 6.3 per
cent, although this is likely to be closer to 6 per
cent with the impact of the US-China trade
war.
In coming years, the International Monetary
Fund (IMF) forecasts China to continue
growing at a rate of 6.3 per cent in 2019 and
2020 and 6 per cent in 2021. These forecast
figures still put it well ahead of most
other major economies’ growth rates and keep
it on track to eventually overtake the US as the
world’s largest economy. Manufacturing,
services and agriculture are the largest sectors
of the Chinese economy – employing the
majority of the population and making the
largest contributions to GDP. Since 1949, the
Chinese Government has been responsible for
planning and managing the national economy.
But it was only after 1978 – when
Deng Xiaoping began market-based reforms –
that growth began to take off, averaging 10 per
cent annually for some 30 years. During that
period, the size of the Chinese economy grew
by roughly 48 times, from USD 168.367
billion (current prices) in 1981 to USD 11.01
trillion in 2015.
Since the introduction of Deng Xiaoping’s
economic reforms, China has what economists
call a socialist market economy – one in which
a dominant state-owned enterprises sector
exists in parallel with market capitalism and
private ownership. It was the active
encouragement of private enterprise from 1978
that enabled China to kick-start the long
expansionary boom that continues today.
Private businesses now produce more than half
of China’s GDP and most of its exports. They
also create most new jobs.
The irresistible rise of China has implications
and consequences for us all on so many levels
and it largely comes down to one word:
opportunity. For Australia, and Australian
businesses in particular, has there ever been an
opportunity like China?
Key Takeaways
 China's economy has grown to one of
the largest and most powerful in the
world over the past few decades.
  Driven by industrial production and
manufacturing exports, China's GDP is
actually now the largest in terms of
purchasing power parity (PPP)
equivalence.
 Despite this growth, China's economy
remains strictly controlled by its
government where there are
accusations of corruption, unfair
dealings, and falsified data.
Industrial Growth
Like most countries looking to develop their
economies, China’s first step was to build up
its heavy industry. Today, China is the world's
leader in manufacturing and produces almost
half of the world’s steel.4
China’s mining industry extracts coal, iron ore,
salt, oil, gas, and gold. To reduce China’s
dependence on coal, the country is moving
towards more renewable resources and plans to
increase its natural gas use in the coming years.
China also has multiple oil reserves, as well as
natural gas deposits that have yet to be fully
explored.
The country is also a good candidate for
hydroelectricity production, and in 2012, the
Three Gorges Dam was completed and is now a
major producer of electricity for the southern
cities of China (including Shanghai).
Manufacturing Revenue
Most Americans know that China is a
manufacturing powerhouse. Besides its large
textile manufacturing sector, the economy also
supplies machinery, cement, food processing,
transportation devices (trains, planes, and
automobiles), consumer goods, and electronics.
Not only does China have many domestic firms
that create hardware and software, but the
country is also a leading assembler of foreign
electronics. The Chinese software and IT
industry grew by over 14.2% from 2018 to
2019, generating revenue of approximately
$940 billion.5
Similarly, China produces automobiles in
factories owned both domestically and by
foreign companies. However, most
automobiles, domestic- and foreign-branded,
are purchased by people in China, a country
that had 340 million vehicles in 2019. Chinese
vehicle sales did decline in 2019 by 8.2%.6
The Chinese automobile industry is criticized
for IP theft and for a bad safety record with
cars produced by domestic firms. The majority
of cars manufactured by Chinese companies are
exported to Africa, South America, the Middle
East, or Russia. Because of China’s unique
distribution and sales methods, car dealerships
and salespeople make a high margin on each
vehicle sale.
Large Production Pharmaceuticals
The Chinese pharmaceutical industry is, like
the rest of China, growing at a fast pace.
China’s drug distribution system is multi-
phased: drugs pass through various tiers and
expensive middle people before arriving at
hospitals and pharmacies. This industry is,
again, plagued with criticisms of IP theft.
Domestic firms are the majority of the market
but international companies like Pfizer (PFE),
GlaxoSmithKline (GSK), Novartis (NVS), and
AstraZeneca (AZN) also have a presence. With
China reforming and regulating the
pharmaceutical industry (increasing OTC
access and enforcing patents), there is a high
potential for investment growth in this area.
Chinese Consumerism
While once a country with rationing and
consumer good shortages, after economic
liberalization, China can be a consumer
paradise for the few with means and a love for
luxury goods. China is home to some of the
largest shopping centers in the world, and, in
addition to wholesaling, retail contributed $1.8
trillion to GDP.
Companies like Alibaba (BABA) have given a
big boost to retail and e-commerce.
Alibaba's Singles Day sale in 2019 saw a
record-breaking $38 billion of sales in just one
day.7
In 2019, travel & tourism in China contributed
$992 billion to the Chinese GDP. Other
services that are big in China include
transportation, real estate, and construction.
China's Economic Concerns
While China’s growth seemed unstoppable at
one point, there are obvious cracks in the
economy that have slowed it down. First off,
the country is under fire for the amount of non-
renewable resources it burns through each year.
With China already considered a large polluter
and emitter of greenhouse gases, the expected
increase in coal usage is troubling to some.
Next, China is home to rampant corruption.
The national government is actively trying to
stamp it out in an effort to make the country
more business-friendly for westerners and to
avoid the economic and business inefficiencies
that come from corruption.
Finally, there’s the problem of
underemployment and inflation in China.
Chinese farmers on small plots of land are
marginally useful and, in an efficient market,
would be unemployed. Although inflation in
2019 was a manageable 2.3%, the last 20 years
have seen the inflation rate vary wildly, a
concern for businesses wanting to invest in the
country.
The Bottom Line
 China has the first or second-largest
economy in the world depending on
whether you’re looking at GDP or PPP.
However, perhaps significantly, the
country is not nearly as developed as
other countries in the top 10.
Government spending is a key driver of
growth which has over the last few
years led to indiscriminate
construction. Even with the largest
population on earth, China struggled to
find buyers for real estate in its ghost
towns. But the government's latest
agenda focuses on stimulus to
reinvigorate economic activity and if
that happens the country has huge room
to grow.