The manufacturing industry in China has typically been the part of the economy that has lead to growth and revenue. Recently, however, the economy has been trending downward as the manufacturing sector continues to show no improvement.
Interest rates had been cut previously in order to allow struggling companies to breathe, but these cuts were not enough according to HSBC economist Julia Wang. She suggests the benefits of these cuts will only benefit governments and will not reach consumers directly.
It is expected that China will continue to cut interest rates in order to help increase manufacturing and labor efforts. Chinese manufactures assemble iPhones and other electronic devices exported all over the world. China’s economy is historically based in export-lead growth of these products sold in foreign markets. The labor market is continuing to shrink despite these cuts and policy changes. The service sector makes up 46 percent of the Chinese economy and is taking a big hit due to the slow demand and decreased investment.
Julian Evans-Pritchard, economist at Capital Economics says, “We are facing an inevitable deceleration in the Chinese economy. I see five to six percent per annum growth over the five years commencing January 2016.”
As investment-led growth decreases, projections on GDP slow down and economist like Evans-Pritchard are predicting a drop in GDP from 7.4 percent to drop as low as 5 percent in the coming years.
Companies are already experiencing the backlash of decreased investment. Unsold goods continue to pile up as revenues lag behind previous growth. Policymakers fear that the Gross Domestic Product could slow to a five-year-low at below 7 percent, should the Chinese economy see another dip.
Regardless of these factors, the Chinese economy recently superseded the U.S. as the world’s number one economy, according to the International Monetary Fund (IMF) report. This is based on the exchange rate and purchasing power parity (PPP). China is finally realizing a prediction held for many years that one day China’s massive economy would one day take over that of the U.S. Currently, the U.S. economy comprises 16.3 percent of the world economy while China’s comprises 16.5 percent of the world’s wealth.
There are many measures used to determine what factors are more important and just based on PPP, the conclusion is not fully comprehensive. Despite China’s recent struggles, the IMF’s report marks the first time since 1945 that the world’s economic leader is not the United States.
– Maxine Gordon
Sources: Market Watch, Reuters, MSN
Photo: ABC News