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The View | Why China’s economy will continue to grow
- While there are issues to be dealt with, the nation’s economic fundamentals are still sound and Beijing has ample room to adapt policies
- The country’s industrial development, meanwhile, will see it through the current property sector downturn and demographic headwinds
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The growth – or lack thereof – of the Chinese economy matters, not only to China but also to the rest of the world. China is now the main trading partner of more than 140 nations and regions. Its share of the world economy is about 18.5 per cent, and it is expected to contribute about 35 per cent of global growth this year.
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While China is expected to meet its 5 per cent growth target for 2023, economic, geopolitical and demographic challenges have raised questions over whether growth can be sustained. The property sector slump has been the biggest drag on the economy since 2022, and the road to recovery from the pandemic lockdowns has been bumpy.
There are signs, however, that the country’s property woes might be tapering off as the sector’s negative contribution to gross domestic product growth has narrowed from about 4 per cent in 2022 to less than 2 per cent. Despite many challenges, China will meet its growth target because it has “quite a bit of policy space”, in the words of US Treasury Secretary Janet Yellen, to help achieve it.
Unlike many other countries, China is not experiencing significant inflation. Its consumer price index in October fell by 0.2 per cent compared to a year earlier. The prevailing lending rates hover around 4-4.5 per cent. Therefore, the real interest rate is still higher than in the US and Europe, where rates must be kept “higher for longer”.
The average ratio of cash deposits China’s banks must park with the central bank is about 7.5 per cent, compared with a 0-1 per cent range for advanced economies. Therefore, China has much room to ease its monetary policy.
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China is also in a more favourable fiscal position. It has a positive financial net worth whereas others, such as the US and Japan, are deeply in debt. The debt-to-GDP ratio of the Chinese government – including the debt of local government financing vehicles – is about 110 per cent, whereas the ratios for the Japanese and US governments are about 260 per cent and 120 per cent respectively.
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