Two of the largest engines of the world economy — United States and China — have slowed down.
China simply wasn’t able to sustain its incredible growth, and that has had ripple effects around the world. Manufacturing and exports have cooled, and the real estate market isn’t the slam dunk that it once was.
In the U.S., the strong dollar has been a drag on growth. American companies are losing money overseas and foreigners aren’t buying as many U.S. goods since they appear more expensive. The OECD slashed its U.S. 2015 growth projection from 3.1% to 2%. If that comes to pass, it would be a dip from last year’s 2.4% GDP.
If Greece fails to reach an agreement with its creditors, Europe will feel the strain again, especially in business confidence. While Germany’s economy remains the lynchpin, overall unemployment is 11.2% in the euro area.
William Pesek talks about China repeating the mistakes of South Korea. South Korea’s economy crashed in 1997 under the weight of debts compiled by the country’s family-owned conglomerates. The government’s strategy for dealing with the fallout consisted of shifting the debt burden to consumers. South Korea household debt as a ratio of gross domestic product is 81 percent. That far exceeds the ratios in U.S., Germany and, at least for the moment, China. As a result, Korea has been particularly susceptible to downturns in the global economy, which is why the country is now veering toward deflation.
South Korea’s per capita GDP merely doubled since 1997. If China followed the same path then China’s per capita GDP PPP (Purchasing power parity) would go from about $13000 to $26000 and the overall GDP PPP would be about $35-40 trillion.
China unveiled China 2025 plans for beginning economic transformation to ultimately be a high tech technology superpower
Headed by Premier Li Keqiang, the country’s cabinet, the State Council, recently unveiled “Made in China 2025,” a sweeping national strategy designed to enhance competitiveness in this sector through automation and overall improvement in technology.
The Made in China 2025 plan was drafted by the Ministry of Industry and Information Technology (MIIT) over two and a half years, with input from 150 experts from the China Academy of Engineering.
It is part of a Chinese vision of an economy driven less by exports and investment and more by services and smart industrial production.
The 10-year strategy involves moving the Chinese economy away from labor-intense and low-value production towards higher value-added manufacturing, and includes plans to improve innovation, integrate technology and industry, strengthen the industrial base, foster Chinese brands and enforce green manufacturing.
It is also set to promote breakthroughs in 10 key industries where China wants to be a leader in the future, including information technology, robotics, aerospace, railways, and electric vehicles. To achieve this, Beijing plans, among other things, to continue a trend of state-directed innovation, proposing to establish 15 manufacturing innovation centers by 2020, which would be expanded to 40 by 2025.
A major source of inspiration for the broad-based strategy has been the German “Industry 4.0” concept – a plan released last year to boost the European nation’s competitiveness through globally interconnected production chains and factories.
In Europe, slow Internet speed negatively affected 86 percent of responding companies. More than 70 percent of respondents stated that Internet environment had even deteriorated. China would need to have a similar lift in needed communications, technical and quality capability and processes.
The “Made in China 2025” strategy is not short on highly specific, measurable goals – featuring a table with 2015, 2020 and 2025 projected targets – the mechanisms for achieving these goals are lacking, and it is not clear which specific agencies are responsible for achieving the goals.
Although there is a significant role for the state in providing an overall framework, utilizing financial and fiscal tools, and supporting the creation of manufacturing innovation centers (15 by 2020 and 40 by 2025), the plan also calls for relying on market institutions, strengthening intellectual property rights protection for small and medium-sized enterprises (SMEs) and the more effective use of intellectual property (IP) in business strategy, and allowing firms to self-declare their own technology standards and help them better participate in international standards setting.
The plan highlights 10 priority sectors:
1) New advanced information technology;
2) Automated machine tools and robotics;
3) Aerospace and aeronautical equipment;
4) Maritime equipment and high-tech shipping;
5) Modern rail transport equipment;
6) New-energy vehicles and equipment;
7) Power equipment;
8) Agricultural equipment;
9) New materials; and
10) Biopharma and advanced medical products.
The unveiling of “Made in China 2025” suggests a major departure from the Hu-Wen administration’s approach to innovation and technology upgrading. The heart of their approach was the Medium- and Long-Term Plan on the Development of Science and Technology.
Australian Financial Review discusses how China has avoided most of financial Crisis
Topping China’s list of economic achievements [to avoid a predicted financial crisis] has been resisting the urge to allow the yuan to devalue in line with the yen and euro, which would have provided an easy boost to the manufacturing sector.
Not doing this has taken some geopolitical heat off of Beijing, while forcing manufacturers to retool, upskill and move quickly to higher value products.
Such a transition will take many years, but in the meantime, the strong-yuan policy has allowed the People’s Bank of China, the central bank, to move more quickly on interest rate liberalisation and opening up the capital account.
This has advanced to a point where China is now expected to lift capital controls for mainland residents from their current level of $US50,000 ($65,700) a year.
The government has taken a few easy wins. It announced import duties on cosmetics, shoes and clothes would be slashed in an effort to boost domestic consumption. Economists have urged the government to do this for years as higher prices on the mainland only encouraged parallel trading, smuggling and tourists to shop overseas.
Perhaps even more significant than the announcement however was the fact that Beijing slashed the duties, by half on average, in the absence of a free trade agreement or pressure in another area.
A Small $427 billion step
Another small but significant step was taken last month when the National Development and Reform Commission earmarked 2 trillion yuan ($427 billion) of infrastructure projects, where the private sector was eligible to invest alongside local governments.
This should lower the debt burden on local authorities and state banks, while providing an opportunity for wealth creation in the private sector.
US Economy from the Fed Beige Book
The U.S. economy emerged slowly in April and May from its winter doldrums, with the housing and retail industries rebounding, but manufacturers and oil producers still hampered by a strong dollar and low crude prices, according to a Federal Reserve report.
The Fed’s beige book described modest to moderate growth in most of the Fed’s regional bank districts, in line with its previous report.
A strong dollar is still hobbling U.S. manufacturers by making their exports more expensive overseas, and oil producers continue to pull back drilling amid low crude prices. Those effects are expected to moderate in coming months as both the dollar and oil stabilize
SOURCES – Deutsche Welle, Bloomberg, CSIS, OECD, CNN, Trading Economics