What's the problem in the Chinese economy

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Economic situation

No country has ever experienced faster economic growth than the PRC. In the years from 2000 to 2010, China achieved economic growth between 8% and 14% and became the second largest economy in the world. The World Bank now ranks China among the countries with an income level in the upper mid-range. The HDI (Human Development Index) awarded by the UN Development Program (UNDP), which includes indicators such as life expectancy, education and health, is currently 0.758 (85th place). China is hereby certified as having a high level of human development.

Nevertheless, the current economic development in China points to a move away from double-digit growth. In 2019, the gross domestic product (GDP) of the People's Republic of China reached a value of 99,086.5 billion yuan (12,682 billion euros) and grew by only 6.1%. The lower growth is due to the fact that the Chinese government is turning away from an investment-driven growth strategy and wants to generate more growth through domestic consumption in the future. The corona crisis led to a massive collapse in economic growth at the beginning of 2020. Despite an unprecedented economic recovery by the end of 2020, even the moderate growth targets will be missed.

At the end of 2020, 15 East Asian countries (including Japan, Korea and Australia) announced the establishment of the largest free trade area in the world. The RCEP (Regional Comprehensive Economic Partnership) comprises 30% of the world's population and 30% of the world's GDP.

Further reasons for the downward trend are structural problems, declining exports, rising wage costs, overcapacity of state-owned companies and the indebtedness of local governments. The Chinese government combats crisis situations with short-term state intervention. In 2008 and 2009, huge stimulus packages worth around $ 800 billion were launched to promote housing, infrastructure projects, medical care, and so on. In 2015, the yuan was devalued to prop up collapsing exports. Important structural reforms, on the other hand, are repeatedly postponed. In addition, the Chinese economy is confronted with Donald Trump's aggressive trade policy on the international stage. Both the US and China imposed punitive tariffs in the billions. The first effects of the trade dispute not only on economic growth, but also on the structure of the production chains in Chinese industry were already noticeable before the corona crisis.

Xi Jinping's economic policy strategy traces the rise of China to become the most important global economic power. To this end, large infrastructure projects are being promoted on the Eurasian continent as part of the Silk Road Initiative. The "Made in China 2025" strategy is also pursuing the goal of developing important industrial sectors into world market leaders. On the other hand, structural reforms to strengthen the private sector have so far been hesitant.

job

In 2019, 775 million people were employed in the PRC. Of these, 442 million people and thus more than half of all workers were employed in urban areas (57.1%). There are high income differences between town and country. The urban per capita income in 2019 was 42,359 yuan, whereas in the country it was only 16,021 yuan.

In 2019, there were 290.77 million migrant workers who offer their labor for low wages in precarious jobs in China's cities. This group is particularly hard hit by economic fluctuations. For example, the 2008 economic crisis, the flattening of the construction boom in 2012 or the 2020 corona crisis each led to millions of layoffs in this group. The official urban unemployment rate in 2019 was 5.2%.

Even if the working conditions for ordinary workers have certainly improved since the 1990s, there are still numerous examples of working conditions that do not meet international standards.

State economy

As a result of the economic reforms, the PR China has changed from an economic system organized according to a planned economy to an economic system that functions primarily according to market economy mechanisms. The dominant role of state capital has declined sharply since the late 1990s.

However, this should not hide the fact that the Chinese state is still linked to the economy in a variety of ways. On the one hand, he is involved in a large number of companies. On the other hand, the most important key sectors such as energy, communication, transport infrastructure, shipbuilding, etc. are still firmly in the hands of 96 large state-owned corporations. Important state-owned companies are, for example, Sinopec, China Telecom, etc.

These corporations are controlled directly by the State Council's State Assets Supervision and Administrative Commission for State Assets (SASAC), which also occupies the important managerial posts. At the same time, all large state corporations have internal party groups of the CCP that can directly influence corporate decisions. The large state corporations are all monopolists or oligopolists and enjoy a number of perks such as access to cheap loans, building land, etc.

The planned economy itself, which was based on a specification of concrete material output figures, was completely abolished in the 1990s. Although there are still five-year programs, these only define the government's development policy guidelines.

The State Commission for Development and Reform, which emerged from the former State Planning Commission, is responsible for drawing up annual indicative economic policy plans. The 13th five-year program (2016-2020) adopted at the beginning of 2016 was dominated by the so-called “new normal”. It sets a growth target of only 6.5%. Growth is to be supported by research and innovation and domestic demand is to be strengthened by expanding the service sector.

The 14th five-year program (2021-2025) will be adopted in March 2021. It is assumed that technological independence, the reduction of dependency on foreign countries and an expansion of climate policy measures (climate neutrality by 2060) will play central roles. Against the background of foreign policy uncertainty (e.g. trade war with the USA) and the consequences of the corona pandemic, it is questionable whether specific growth targets will be issued again. It is assumed that a gross domestic product (GDP) per capita in the amount of a "middle industrialized country" is given as a growth target.

agricultural economics

The famous rice terraces aptly symbolize the dilemma of the agricultural economy in China: Although a large country in terms of area, only about a tenth of the total area is suitable for agricultural use. At the same time, however, China is forced to supply over 20% of the world's population with 10% of the world's agricultural area. Agricultural ingenuity already included terrace construction, irrigation technology, higher-yielding fruit varieties and much more during the imperial era. spawned. Nowadays there is also the intensive use of artificial fertilizers.

The main crops in northern China are wheat and maize, while maize and soybeans predominate in the northeast. Half of the rice is grown in the middle and lower reaches of the Changjiang. Overall, the PR China provides almost 30% of the world's rice harvest. Cotton is grown in the north Chinese plains, the middle and lower reaches of the Changjiang and in Xinjiang. Other important agricultural products are sweet potatoes, sugar cane, tobacco and jute. In addition to field crops, China also has a large meat production and is the largest fishing nation in the world. China's agricultural economy only generated around 7.1 of GDP in 2019.

Due to many food scandals, Chinese politicians are trying to improve the quality of Chinese food through stricter food laws and better organic certification. In fact, there are more and more organic producers in the PRC.

Industry and technology

China is now an industrialized country. The industry generated 39% of GDP in 2019. Industrial growth in 2019 was 5.7% and was thus well below the average growth of the last ten years (approx. 10%). The PR China is one of the largest producers of fertilizer, cement, iron and steel, textiles, paper products, vehicles and electronics in the world.

China is also still the “workbench of the world”, which is underlined by the double-digit growth figures in the areas of electronics, information and communication technology and environmental technology. However, the pressure from other low-wage countries in the neighborhood is increasing. The textile and clothing industry in particular is suffering from rising wage and raw material costs as well as competition from countries such as Bangladesh and Vietnam.

The Xi Jinping government has set itself the goal of developing key industries in China to become world market leaders by 2025. This strategy, known as "Made in China 2025", extends to branches of industry such as robotics, artificial intelligence, medical technology, energy-saving vehicle technology, industrial software, etc.

China's drive to become a high-tech country is highlighted by events such as the landing of a space probe on the far side of the moon in January 2019. At the same time, the high pace of innovation also crosses ethical boundaries, as the world's first genetically modified infants were born at the end of 2018.

Energy industry

The PR China is the largest consumer of energy in the world and the second largest consumer of oil. China is also the world's largest crude oil importer, importing 10.1 million barrels per day from Russia, Angola, Saudi Arabia, Iran, Oman and other countries in 2019.

Although China is now making high investments in the field of renewable energies, coal was still the most important energy source in 2017 with around 64% in the overall mix. In second place was crude oil with 18.5%. Hydropower, biofuels and wind power together covered 10.3% of the nation's energy needs, natural gas 6.4% and nuclear 2.1%.

The great hunger for energy in its economy is forcing China to use up most of its oil and gas reserves itself. A special interest is therefore in the development of offshore raw material sources on one's own doorstep in the East China and South China Sea, which is problematic due to territorial disputes with various neighboring countries. At the same time, people are working hard to develop new sources of energy and know-how for China around the world. The PR China has been particularly active in Africa in recent years.

Domestic and foreign trade

A central concern of the Chinese government is to base growth on domestic demand and to become less dependent on exports and investments. The service sector, which is responsible for this task, accounted for 53.9% of GDP in 2019.

Indeed, domestic trade is booming, and according to official figures it was worth 41.165 billion yuan (€ 5,269 billion) in 2019. However, it still lags behind foreign trade. According to the WTO, the share of the "export world champion" China in world trade amounted to 12.8% in 2017. In 2019, goods to the value of € 2,205 billion were exported and goods to the value of € 1,832 billion were imported. The main exports were electronics, textiles, electrical engineering and machines. The main customer countries were the USA, Japan, South Korea and Germany.

China's dependence on exports is also a weakness that politicians are paying more and more attention to. On the one hand, China is susceptible to collapsing international demand in the wake of economic crises. On the other hand, some industries are no longer competitive with countries such as Bangladesh or Vietnam due to increased wage costs.

A trade war between China and the USA has also caused great uncertainty since Donald Trump took office. As a first step, the US government levied tariffs on Chinese goods, while the Beijing government initiated retaliatory measures. In August 2019, China devalued its currency to bolster exports. In September, the US announced further tariffs on Chinese goods. The trade war is now making itself felt in a decline in industrial growth. A partial agreement was only reached at the end of 2019, which provides for the lowering of tariffs on Chinese products and the purchase of American products by China.

Currency and banking system

China's currency is the Renminbi (Yuan / RMB at 10 Jiao [Chiao] or 100 Fen). The exchange rate of the yuan is not free, but may fluctuate 2% up or down in relation to the daily reference rate to the dollar set by the central bank.

Although the yuan was recognized by the IMF as a reserve currency at the end of 2015, the yuan can still only be traded in special payment centers (e.g. Frankfurt) and is not freely convertible. In the past, the USA in particular accused China of deliberately undervaluing the yuan in order to boost its own exports.

An example of such an approach was the price cuts by the Chinese central bank in the summer of 2015 by 1.9% and 1.6% respectively. In general, however, the yuan has appreciated in value over the years. Between 2005 and 2013, for example, it increased in value by almost 32%. But it is also a fact that the People's Republic of China has the largest currency reserves in the world, which are currently around US $ 3.0 trillion.

At the top of the Chinese financial system is the People's Bank (Renmin Yinhang), which performs the functions of a central bank such as money supply control and exchange rate policy. Otherwise, the Chinese banking system is characterized by four large state-controlled banks. These are the Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC) and the China Construction Bank (CCB). Other smaller banks are, for example, the China Minsheng Bank or the China CITIC Bank.

China's banks are closely linked to the state and, if necessary, have to serve to support even unprofitable projects with large loans. Many industries and local governments were thus driven into over-indebtedness.

Since private individuals find it difficult to take out loans due to the large banks' focus on state actors, shadow banks in China play a role that should not be underestimated.

State budget

Chinese government spending for 2019 was 23,887.4 billion yuan, according to official figures. The largest expenditure items in 2018 included education (15%), social security (11.5%) and agriculture (10%). The military budget is officially 5.2% of the total budget, but experts estimate it to be much higher.

The public debt of the PRC was 44,762.2 billion yuan (5,721.1 billion euros) in 2018, 50.4% of GDP. Although this is a comparatively low debt ratio, the indebtedness of local governments in particular has increased dramatically in recent years. This is exacerbated by the fact that China's local governments have only limited income flows, but at the same time have to pay for the high costs of social benefits and schooling.

Some international experts even assume that the PRC's total debt is significantly higher. A 2015 McKinsey study, including government, corporate, household and financial institutions' debts, estimated China's total debt burden at US $ 28.2 trillion, which corresponds to 283% of GDP.

Poverty and Development Policy

poverty

In the course of more than 30 years of economic reforms, the People's Republic of China has developed from a developing country, in which poverty and hunger were part of everyday life for many people, to a middle-income country. The World Bank assumes that the agricultural and industrial reforms between 1981 and 2004 catapulted around 600 million people out of poverty.

However, the absolute poverty rate remains high. At the end of 2019, according to official figures, 0.6% of the rural population lived below the poverty line, which corresponds to 5.51 million people. Since the late 1990s, urban poverty has also increased.

Only since 2010 has China's official poverty line, which entitles the holder to basic security benefits, to the World Bank standard. It is currently 2,300 yuan per year (= US $ 363). In 2019, around 34.6 million people in rural areas and 8.6 million in cities received basic state security.

Despite unprecedented success in fighting poverty, the FAO estimates that over 124.5 million people are currently undernourished. The rural population is structurally disadvantaged in terms of food security, especially in the underdeveloped western areas.

In addition to poverty problems, the People's Republic of China is struggling with increasing income inequality and has a Gini coefficient of 0.46. A large crowd with low incomes contrasts with a small class of extremely wealthy Chinese who are now represented in international rankings.

Development cooperation

Due to the economic consolidation and the rapid growth of the 1990s and 2000s, previously existing development cooperations with the People's Republic of China were gradually scaled back.

From 1981 to 2010, China received US $ 47.4 billion in loans from the World Bank. Since 1999, China has not received loans from the International Development Association (IDA), but only from the International Bank for Reconstruction and Development (IBRD). In the field of development work, however, organizations such as the World Bank, UNDP and the OECD are still represented.

The Federal Ministry for Economic Cooperation and Development (BMZ) also ended traditional development cooperation with the People's Republic of China at the end of 2010 and is not making any funds available for new projects. Current projects focus on promoting education in western China, rural development (afforestation, water management), environmental protection, renewable energies and the fight against tuberculosis.

The major political foundations of the Federal Republic of Germany are also active in the People's Republic of China. The Konrad Adenauer Foundation, the Friedrich Ebert Foundation, the Heinrich Bölll Foundation, the Rosa Luxemburg Foundation and the Hans Seidel Foundation have offices in China. However, the work of the foundations has become more difficult since a new NGO law came into force at the beginning of 2017, which imposes stricter requirements on foreign NGOs.

Meanwhile, the PR China itself is active in development aid. In mid-2015, the Asian Infrastructure Investment Bank (AIIB), initiated by China, was launched with a share capital of US $ 100 billion. According to China's request, the institution, in which the People's Republic of China holds 30.4% of the shares, should primarily provide money for infrastructure projects in Asia. Germany is also involved in the AIIB with US $ 900 million, the USA has so far refused to participate.

Africa is an important focus of China's development policy. The development policy measures pursued here are suspected of merely serving China's own interests, in particular securing raw materials and promoting exports. Nevertheless, the development of infrastructure in Africa driven by China is considerable. In addition to investments and loans, the PR China's services also include the provision of technical personnel. In September 2018, the People's Republic of China announced that it would invest another 60 billion dollars in Africa over the next few years. Other emerging and developing regions such as Latin America are also supported by China.

In 2018, theChinese International Development Cooperation Agency (CIDCA) an umbrella organization for development policy was founded to coordinate development aid for the People's Republic of China with the involvement of various authorities (2019 budget: US $ 18 million). According to the Ministry of Finance, the budget for development aid in 2019 was US $ 2.63 billion.

New silk road

Even if Xi Jinping did not initiate fundamental economic reforms in his first term in office, he always appeared as an advocate of international trade. This endeavor is expressed above all in the international infrastructure project that has been driven forward since 2013, which has become known as the "New Silk Road" (in Chinese Yidai-Yilu "One band, one road"). With an investment volume of around 900 billion dollars, roads, railways, ports, pipelines and power plants are to be built between East Asia and Europe in order to stimulate overland and overseas trade between China and Europe. The aim is to build six international economic corridors, including the New Eurasian Land Bridge, the China-Mongolia-Russia and China-Central Asia-West Asia corridors. Due to structural problems and debt trends, the Silk Road strategy was realigned in 2017.

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