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China’s outlook for 2015: The road ahead

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Christine Lagarde speaking at the world economic forum.

It’s been a tough year worldwide. There have been international conflicts emerging, shaking our hopes of progress in the globalized era. There was a sharp drop in oil prices that has still yet to take its toll on the global economy. There was the risk of Europe falling into another recession and the general slowing of Asian economies.

While we heard some murmers of “optimism” and “consolidation” from the IMF and the World Bank, we look forward towards 2015 with hopes of improvement.

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Aside from the worldwide problems that will have a knock-on effect on China’s largely interdependent economy, China also faces its own domestic challenges.

  1. GDP per capita must eventually rise, considerably. Currently China is on the 93rd place in the world of GDP per capita. This means for the country that it needs to rise 32% to meet the world average. It needs to triple to equal the European average.
  1. The huge environmental issue. Some reports state that China cannot use some of its domestic natural resources such as coal, iron and others because it’s too dirty. This is one of the main challenges in China as from a pollution perspective, for example Beijing is becoming one of the worst cities to live in.
  1. Increase of income leads to larger consumption. The evidence of that could be seen on “Single’s day” which broke all records of purchases across the globe. China has always been regarded as the world factory for international markets but now more and more is consumed domestically.
  1. A rise in income also raises the real estate price that has led to a housing boom. It is a transitional change from lower to middle class society but it’s something China has to deal with in short term as the gap between rich and poor increases.
  1. Rising income also puts more strain on an export economy. Workers are demanding bigger salaries and better living and working conditions which pushes up the cost of the end product.  Countries are already sourcing products which require more involved handwork to other countries such as Vietnam where labour is cheaper.  Meanwhile the government struggles to keep the value of RMB low for its export industry in a country that’s clearly experiencing a boom.
  1. Consumers are more and more concerned about what they buy. Companies that produce for the domestic market are used to selling poorer quality products leading to massive brand loyalty. Better quality means better production standards countrywide and it’s going to cost.

All those indicators show that the economy in an ongoing process of change and evolution. GDP growth will remain steady around the 7% mark, impressive even if not the quite glory years of 2010 and before. Currently this resembles the progress of Japan in the 60s and Korea in the 80s.

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A growth of 7.4% is expected for 2014

China is rapidly changing and there are many internal issues that will come to light in the coming years. But it is inevitable to have a couple of bumps along a long road. The positive indicators are still flashing everywhere. The infrastructure is booming all around from small villages to the big cities. China is consistently investing a lot in its infrastructure in order to facilitate moving people from the country and into the cities. The increase of incomes is establishing a consumer oriented economy for the future. Small cities are seeing 20 to 30% growth. Savings rates are still very high but the government is planning reforms about this matter. Efforts are being made to try to ensure growth will be sustainable in the future, the epitome of a truly successful economy and a lesson harshly learned in Europe.

No matter the slowdown, China will still remain one of world’s biggest lenders. The Chinese Yuan will gain stronger positions towards the USD and the Euro.

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