Weaker growth prospects in China
China has had roughly around 10 percent annual growth for 25 years. This totally unprecedented in world history. China is the world’s second largest economy after the United States. Hundreds of millions have been lifted out of poverty.
growth and increased prosperity are of China experts seen as a prerequisite for the Communist Party to stay in power and to prevent social unrest in the world’s most populous countries.
In recent years, growth in China fell to around 7 percent. This is still very high compared with the world’s developed countries. This summer’s big fall in China’s stock exchanges may be warning of a further downturn in the economy.
Exports have been the engine of Chinese growth. A short time ago came the figures showing that exports fell 8.3 percent from July last year to July this year. Weaker Chinese currency makes Chinese goods cheaper abroad, and can thus help to boost growth and exports again.
Strong voices in the United States have long argued that China keeps its currency artificially weak to give own businesses advantages in competition with foreigners.
To estimate the “correct exchange rate” is a demanding discipline that engages many economists. Opinion is divided about China’s exchange rate. The International Monetary Fund (IMF) said in May that China’s currency not was artificially weak.
New currency market
The exchange is the price of other countries’ money. In an economy with a large foreign trade has a key role in influencing prices and resource use. Example: In Norway weaker krone to strengthen export companies much at a time when demand from the Norwegian continental shelf has fallen because of lower oil prices.
In the world’s developed countries flows of goods, services and money freely back and forth over borders. It’s supply and demand for different countries’ money that determines the exchange rate. Changed course important channel to adapt to changes in the economy at home and abroad.
Not so in China. Both government and market forces affecting the exchange rate in a complex interplay. It is possible for the authorities heading because it is controlled on taking money in and out of China.
But the closer China has been woven into the world economy, the stronger the press market forces on the exchange rate.
So far, the authorities have daily set a price, but accepted that market forces swings heading 2 percent above and below this centerpiece.
In connection with the last days depreciation of the exchange rate, the central bank said that the daily scheduled midpoint among others shall be based on yesterday’s actual course.
This is seen as a significant step towards more market-determined exchange rates. IMF praises decision. IMF believes China “can and should” have market-determined exchange rates within two to three years.
Focus on investment and exports
China disposes of its annual wealth creation completely different most other countries. Savings in the country is soaring.
Put another way: China invests very much in terms of new buildings, more infrastructure, new factories and housing unparalleled. Many of the investments are determined political or affected. Therefore profitability often poor.
The country’s savings also occurs in the form of large trade surplus in that exports are much higher than imports. The pension system and the social safety net is weak. Therefore saving Chinese citizens much.
A central goal of economic policy is to increase private consumption at the expense of investment and exports. It means to adjust the economy from steel and cement to refrigerators, phones and holidays.
In order to achieve this, the central bank has long held currency relatively strong. This helps animal exports and cheap imports. This distorts the economy towards more domestic consumption.
A weaker currency to strengthen exports may look like a throwback to the long-term restructuring of the Chinese economy. Nevertheless, sustained high economic growth is the most important, although realignment to a consumer economy can take be delayed.
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