China's economic growth is slowing down which poses risks to the global economy. China has long relied on exports and investment to drive growth but is now transitioning to a more consumer-based economy. The slowdown is being driven by falling exports, declining domestic investment and consumption, high debt levels, an aging population, and other challenges. Many countries will feel the effects, especially commodity exporters to China. Institutional reforms are needed in China to address issues like state-owned enterprises, education, and the aging workforce to help sustain economic growth over the long run.

3. 2010
2011
2012
GNI PER CAPITA, PPP($)
7510
8400
9060
POPULATION (BN)
1.34
1.34
1.35
GDP($TN)
5.95
7.31
8.36
GDP (%)
10.4
9.3
7.8
Population
GDP (current US$)
Population
GDP (current US$)
1.35
5949.79
1.34
1.34
2010
7314.43
8358.36
BILLIONS
2011
2012
2010
2011
2012

5. EMERGING ECONOMIES
China GDP growth (annual %)
India
11
10.40
9.30
7.80
6
3
2010
2011
2012

7. 1. Economic
weakness
in
the
U.S.
and
Europe
China has long relied on its cheap export machine to fuel growth, but exports
slowed dramatically. The main culprits are a "recession in Europe and a
patchy economic recovery" in the U.S. The dip in exports was
expected, given that "it's hard for the Chinese to sell stuff to Europeans who
don't have money to spend.
1. A
falloff
in
domestic
demand
China's imports in April 2012 rose an anemic 0.3 percent from the previous
month, the lowest figure since the global economy was in the midst of the
financial crisis of 2009. The data indicate that Chinese businesses appeared
to lose much of their appetite for products as varied as iron ore and
computer chips.
2. Inflation
worries
China could "easily kickstart growth" by enacting a fiscal stimulus plan, but
the government is concerned that a flood of money would cause prices to
spike. Rampant inflation could "increase social unrest," and "discontent
among the poor and middle class is a major source of anxiety for Chinese
leaders.

8. 4. Housing
and
banking
are
a
mess
Following a real estate bubble; China's housing market is cratering. In
addition, the country's shady banking sector, which helped inflate the
bubble, is likely rife with bad loans, even though the government helps hide
them. China's banking system is built on "quicksand and it's only a matter of
time before "the jig will be up."
5. A
corrupt
political
system
Many of China's economic problems are really political in origin. Economists
are encouraging the government to open up the economy with private
investment and currency reforms, but such changes "would involve a titanic
power struggle" with "army generals, Politburo members, local officials, and
the 'princeling' children of Communist party elders," who "have little incentive
to refashion a system that fills their coffers.”

9. 6. In 2011, investment hit an astonishing
50% of GDP — an unprecedented
and unsustainable
level for any
major economy. China
was
spending
more
on
infrastructure, pouring more concrete
— than the US and Europe
combined.
7. According to an early 2011 estimate
from Capital Economics, there were
only about 15 million people still
underemployed in rural areas.
8. The fountain of youth runs dry: Only
five million Chinese will enter the
core working ages of 35-54 this
decade, down from 90 million during
2000-10. That’s why some analysts say
that China will grow old before it
grows rich.

10. 9. The invisible debt: The debt of
households
and
corporations
amounts to 130% of GDP — nearly
200% if the murky shadow banking
sector is included.
9. Wage inflation —the same symptom
that signaled a slowdown in the other
Asian miracle economies — is now
running at a 15% annual pace, and
labour has the upper hand in
negotiations.
11. Chinese consumption has been
falling as a share of GDP only
because investment has been
growing even faster. Over the past
decade, investment grew at an
annual rate of15%, up from 12% .

11. $bn
%

12. • Average
new
house
prices
of
China's
first-tier
cities, Beijing, Shanghai, Shenzhen and Guangzhou rose by more than 50% in
2009.
• In 2010, the State Council and most regional governments pronounced a
series of policies designed to control house prices.
• The impact of such policies, however, has appeared ineffective.
•
By the end of 2010, the average new house prices in these cities rose from
24% (Guangzhou) to 42% (Beijing).

13. • China cuts bank reserve need to spur
lending after data showed that
slowdown in growth is deepening.
• Reserve ratios fell 50 basis points on
May18, 2012.
• The level for the nation's largest
lenders will decline to 20 per cent.
• A 50 basis-point cut in the reserve
requirement
in
February
2012
probably added 400 billion Yuan
($63.4 billion) to the financial
system, according to ANZ estimates.
• As the government is adopting a
more assertive monetary policy to
stimulate the economy but there is
every possibility of over-stimulating.

15. • The growth of China's shadow banking system with estimated outstanding
credits equaling roughly 10-15% of the balance sheet of the formal banking
sector has long been flagged as a source of risk in China's financial sector.
• The non-performing loans (NPL) account for 26.6% of total lending by China’s
top four state-owned commercial banks. In September 2012, NPL’s held by
these banks totaled 1.8 TN Yuan ($217 BN).
• State-owned banks classify a loan as non-performing only if interest payments
have not been paid for two years.
• By contrast, the international standard classifies bad loans as those that have
not been serviced after three months.
• According to Ernst & Young, nearly half of the loans made by the Chinese
banks may never be repaid.

16. • According to IMF, China grew at 9.2% in 2011. But in
2012, the growth target was estimated at 7.5% due
to fall in domestic demand owing to inflation and
increasing wealth gap.
• In 2013, disposable income growth for urban
households slowed to 6.5%, down from 9.7% growth
in the first half of 2012 and below the growth rate of
the economy as a whole. That contributed to a slide
in the share of consumption in China's growth.
• Salaries are increasing at a much lower rate, thus
disturbing the consumption pattern throughout the
country.
• Cautious consumers have thrown China back on its
old reliance on investment spending to drive
growth. Consumption contributed 45.2% to GDP
growth in the first half of 2013, down from 60.4% in
the first half of 2012.

17. http://www.youtube.com/watch?v=
AenPccfSocw

18. 1. China's slowdown cast a shadow
over Europe and Asia.
2. Investors
in Germany,
Europe's
biggest economy, turned gloomy this
month on fears over falling exports to
China, in a stark illustration of the new
globalized power of the Asian
nation's industry and consumers.
3. The
Asian
Development
Bank
warned that China's slowing growth
was weakening momentum and
trimmed its outlook for developing
Asia to 6.3 per cent in 2013, from 6.6
per cent.

19. 4. Slower growth will have impact on
those countries who have strong
trade links with China -- like
Australia, Brazil and the South East
Asia region -- as demand will fall.
4. Since China is moving away from
investment to a more consumer
driven economy, the likely loser
countries are the ones supplying raw
material for Chinese investment.
6. A bursting China bubble would be a
massive deflationary shock to the
world economy and investors would
face very bleak and frightening
prospects.
6. The slowdown in China underscores
risks to the global recovery as job
growth in the U.S. slumps.

20. • China is a key downside risk to the global economy. If growth continues to
decline in the world's second-largest economy, developed economies will be
disappointed as it would eventually lead to a global crisis.
• China is vital for the smooth functioning of global economies because the
Asian powerhouse nation is a major consumer of commodities, like crude
oil, steel, and copper, and of manufactured products like cars and airplanes.
ITEMS
MILLION TONNES
GROWTH %
$BN
GROWTH %
SOYBEANS
54.8
28.8
25.1
33.5
IRON ORES
618.6
-1.4
79.4
58.4
COAL
164.8
30.9
16.9
60.1
OIL
239.3
17.5
135.2
51.4
OIL PRODUCTS
36.9
-0.1
22.3
31.3
PLASTICS
23.9
0.4
43.6
25.2
STEEL PRODUCTS
16.4
-6.8
20.1
3.3
COPPER
4.3
0.0
32.7
44.4

21. • Poor Governance: China maintains a weak
and relatively decentralized government
structure to regulate economic activity in
China.
• State-owned Enterprises: China’s huge
apparatus of state-owned enterprises
(SOEs) is a popular punching bag:
economists decry its inefficiencies; foreign
politicians
complain
about
unfair
competition.
• Low Human Capital Formation: Due to low
human capital, China is going to have
huge shortage of skilled and educated
labour. The employment/population ratio
declines by about 1/2 percentage points
between 2011 and 2030, from 78% to 69%
percent.

22. • Aging Population: The Chinese population
is expected to peak in 2030s and 2040s
and begin to slowly drop. The population
growth is expected to slow to near zero
over the next 40 years.
• Growing Pollution: The U.S. Energy
Information Administration (EIA) projects
that by 2035, China’s carbon dioxide
emissions (CO2) could be nearly double its
current levels. A study by ExxonMobil
projects that, by 2030, China’s CO2
emissions could equal the level in the
United States and EU combined.

23. Projections of U.S. and Chinese Annual Real GDP Growth Rates: 2013-2030
(percent)
Source: Economist Intelligence Unit.

24. • Institutional reforms to be undertaken:
1.
Increasing openness to private enterprises:
The private sector, having made progress
during the economic system reform, had
relaxed the economic structure as a first step
and viewed that the new ownership
structure in which the previously-dominant
public ownership coexisted within various
economic sectors was a substitute for pure
public ownership, therefore promoting
market oriented reform.
2.
Reforming the State-owned Enterprises:
reform is needed if the economy is to further
evolve, and this is widely accepted by the
Chinese leadership. The market would be
given greater room to operate, including
allowing private businesses to compete on
an
equal
footing
with
state-owned
enterprises.

25. 3.
Improving education: The World Bankfunded
Guangdong
Technical
and
Vocational Education and Training Project is
helping
three
technical
schools
in
Guangdong Province to overcome these
challenges so that vocational education
can improve its quality and become more
relevant to students’ needs. This will help
produce more skilled workforce which China
badly needs going forward.
3. Improving Infrastructure: The Integrated
Economic Development of Small Towns
Project aims to assist the governments to
adopt and demonstrate comprehensive
economic
development
approach
to
promote effective integration of urban and
rural
development,
and
boost
socially, economically and environmentally
sustainable development in small towns. This
will help generate employment and incomes
and improve quality of life in small towns.

26. 5. Reforms in the role of the Govt.:
China needs an intergovernmental system
which:
•
is consistent with maintaining an appropriate
income elasticity of revenues.
•
provides incentives for public infrastructure
development;
•
supports central government macroeconomic
management;
•
will influence resource allocation in line with
national goals and priorities;
•
will promote income
and, most importantly,
•
supports and is consistent with system
reforms such as price and enterprise reforms
distribution
goals;

27. http://www.reuters.com/video/2
013/10/04/reuters-tv-the-threatsto-chinasfuture?videoId=274032634&vide
oChannel=117851