Global Economy

The Problems in China’s Economy

China’s economy has been slowing down. In fact, the Wall Street Journal reported that the GDP of China’s economy has dropped from 7.2% at the end of 2014 to 6.4% in June 2016. Despite China’s economic slow down, the Chinese economy is still doing fine. However, there are some problems in China’s economy, including the misallocation of capital and rising private debt. These problems are important to analyse because both could create larger economic problems for China that could lead to financial instability.

The Misallocation Capital

In an effort to increase economic activity in China, the Chinese government has increased the number of new project approvals. This has led to capital being over-allocated to the production of coal plants. For example, the New York Times has explained that several coal plants are being built-in China that could potentially operate at 5,500 hours per year. However, the amount of coal plants in China surpass demand by so much that these coal plants operated at an average of only 4,300 hours. Next year, these factories are expected to operate at an average of 3,600 hours. It is important to note that the Chinese government has been trying to fix this misallocation of capital. Beijing has published guidelines to stop the approval of new coal plants, however, the new guidelines do not apply to coal plants currently under construction.

Ghost cities are another result of the misallocation of capital in China. Ghost-cities are cities that have nearly zero inhabitants. In China, rapid development and the misallocation of capital has led to the development of many ghost cities. Other states going through rapid development, including Brazil and India, have also built ghost towns and cities, but not to the same degree as China. This is because in China municipal governments can easily and cheaply buy rural land to build cities. According to the Wall Street Journal, this leads to government officials building cities for prestige or to provide jobs to friends. Also, the ghost cities built-in China do not cater to the needs of the general population. For example, the cities do not have many necessities, such as schools or hospitals.

Conch Bay is a ghost city in China. (Greg Baker/AFP/Getty Images/NPR)[3]

Conch Bay is a ghost city in China. (Greg Baker/AFP/Getty Images/NPR)[3]

Growing Debt

In order to ensure the growth of China’s economy, Beijing has continued to increase demand by increasing credit. In other words, the Chinese government has continued to encourage corporations, many of which are state-owned enterprises, to borrow more money so the corporations can spend more money. This may have increased the size of China’s economy, but it also increased Chinese debt. In fact, The Economist explains that at the end of 2015 private debt was about 240% of GDP. With this increase in debt, private companies are less able to invest in projects, due to the increase in interest payments that come along with an increase in debt. Additionally, many state-owned enterprises are not earning enough to service their debts.

Protection From Financial Instability

Just like any other state’s economy, China’s economy has its faults. China’s misallocation of capital promotes wasteful spending and increases debt. Additionally, growing debt in China could cause a decrease in aggregate demand. Both of these factors could lead to a recession or could cause other economic problems. However, China’s GDP is still high when compared with many other states. The Chinese government also has a surplus, a large amount of foreign exchange reserves, and China’s debt is mostly owned domestically. All of these factors protect China from financial instability. But financial instability in China is not implausible. It is important to look at the problems in China’s economy and research the best policies to address issues in China’s economy. If these problems continue to go unaddressed then there will be a higher likelihood of financial instability affecting China and the World in the future.

Image: The Economist, BIS

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Oil Prices and the Global Economy

The European Central Bank provided some interesting information about today’s oil prices and the global economy. The report basically explains that low oil prices may not be positively effecting the global economy because oil prices have been driven lower due to a decrease in demand rather than a decrease in supply.

During the beginning of 2015, oil prices were decreasing due to decreases in supply. It was predicted that a supply driven decrease in oil prices would positively effect the global economy. However, in late 2015 oil prices fell due to decreased demand. Simulations have suggested that demand driven decreases in oil prices negatively effect the global economy. For example, it is estimated that a 10% supply driven fall in oil prices increase world GDP by 0.1% to 0.2%. On the other hand, a 10% demand driven fall in oil prices decrease world GDP by more than 0.2%. Simulations also suggest that the impact of both of these forces in one year would cancel each other out and result in nearly a zero percentage effect on GDP.

While world GDP may not be positively effected by demand driven decreases in oil prices, these lower oil prices do benefit oil importing states, such as the US. However, the benefit has been small and has not outweighed the negatives that are brought onto the world economy. These negatives include oil exporting states experiencing significant declines in GDP growth and currency depreciation. These problems faced by oil exporting states cause spill over effects that impact trading partners and global economic activity [1].

When viewed from a macro perspective, the current decrease in the price of oil is not good. A demand driven decrease in oil prices means that the economies of oil producing states are not growing as quickly. As a result, the world economy suffers. The following charts provide further information about oil exporting states, GDP growth, and oil prices.

ECB_Pic

Read the European Central Bank’s report: ECB_Economic_Bulletin

The Danger in Trump’s Trade Proposals

Are Donald Trump’s international trade proposals really that bad? Yes, yes they are. Let’s take a look at a few of Donald Trump’s international trade proposals.

  1. 20% tax on imports
  2. 15% tax for outsourcing jobs
  3. Donald Trump appointing himself as the United States Trade Representative

20% tax on imports
A 20% tax on imports is a tariff. Tariffs may sound like they would protect American jobs and industries, but tariffs are actually harmful. High tariffs decrease foreign competition and protect inefficient industries which leads to industries becoming even more inefficient. This means that tariffs basically bail out inefficient industries. This bail out is paid by Americans through the increased costs of goods and services. The increased costs of goods and services could lead to a decrease in the demand of goods which could cause people to lose their jobs.

15% tax for outsourcing jobs
A 15% tax on companies that outsource jobs may sound like a good idea. After all, it would help to ensure that people don’t lose their jobs to outsourcing. However, this tax would have effects similar to a tariff. It would promote inefficiency and keep prices high.

Donald Trump appointing himself as the United States Trade Representative
If Donald Trump became president, it would be a terrible idea for him to appoint himself as America’s trade representative. Besides him not having enough time to be the United States Trade Representative due to various presidential duties, Donald Trump does not have the expertise to be the United States Trade Representative. The current United States Trade Representative, Michael Froman, has extensive experience in international economics and public policy. Donald Trump on the other hand is a business man, he does not have much experience in international economics or public policy.

Image: Mr Donald Trump New Hampshire Town Hall on August 19th, 2015 at Pinkerton Academy in Derry, NH by Michael Vadon https://www.flickr.com/photos/80038275@N00/20724485306

A Look At The Global Economy (June 2016)

The global economy is expected to grow at a moderate pace for the next few years. The Conference Board predicts that world total GDP growth rates will hover around 2 and 3 percent over the next ten years. Throughout the rest of the year, it is expected that the output of mature economies will slow down while output is expected to marginally improve in emerging markets, such as Russia and Brazil. [1] The data tables provide a look at world total GDP, GDP by state and region, projected GDP, and labor productivity growth.

View Data Tables


Sources
[1] The Conference Board. “Global Economic Outlook 2016” bbc.com/news/business-15198789

[Image Source: What does weak US wage growth mean for the global economy and US rates? CMC Markets 3rd July https://www.youtube.com/watch?v=5-kIzITgerk]