The main economic challenges faced by China today are directly connected to the weakening Chinese yuan and the diminished supply of money. As a result, you can say that it’s going to be a difficult period for China.
This year alone, China’s factories have produced products that haven’t been sold. Market volatility may also be the direct result of overestimated demand and unused resources.
In China, you’ll find many unoccupied apartment buildings which are visual evidence of potential stagnant growth. So the country’s future really depends on the economic plan.
China’s economic expansion was powered by debt and investment. That’s not enough anymore, so spending measures aren’t part of future plans. Changing the interest rate can also have a negative impact on the country’s economy, so it’s not an easy thing to overcome. Further, surging debt has significantly lowered economic output.
So what does China do?
China is looking to double its GDP by 2020 (based on 2010 figures). Further, the budget deficit is expected to expand.
So far, property investment and factory output have remained low and impacted overall growth.
China has built too many homes and that has contributed to deflation. The government has put forth plans to combat thus by reducing the supply of homes.
With the U.S. dollar remaining strong, the yuan isn’t expected to gain enough strength to negate deflation. So the government is basically trying to increase aggregate demand through policy.
A big part of the problem in China last year was the fact that corporate loan defaults jumped from 43% in the first quarter to 73%. The industrial sector is mainly operating at a loss and this has left the Chinese banking system overexposed.
When corporations default on their loans, the entire country feels the repercussions. So the government will try to overcome this challenge by reducing costs for entrepreneurs. They will do this by cutting taxes to reduce corporate liabilities.
As China is overexposed to the U.S. dollar, it can contribute to increased capital outflows. Part of the reason for capital outflow has been increased competition between banks on deposit rates.
The primary risks faced by companies are increased competition, higher labor and operations costs, and slowing domestic economy. So it will take some time to rectify this situation.
As a result, economists predict modest growth after the economic slowdown.