“Made in China” is a common sign seen today on thousands of products bought and sold in the U.S. and around the world. But there was a time years ago when China, as a communist state, was considered persona non grata and was eliminated as a viable country with which to do business.
The country has made tremendous strides since its major liberalizations in the last quarter of the 20th century and has emerged as the world’s second largest economy.
According to HSBC analysts, half of all Chinese investment between 1952 and 2013 came in the last five years of that six-decade period while the country's GDP remains less than one-quarter of that in the U.S.
And now the country is in trouble. The slowing growth especially in its corporate sector and its over zealousness in investment has left the country in heavy debt rising to over 100 per cent of GDP between 2007 and 2014.
Aging Population a Challenge
Other factors besides its indebtedness are contributing to the country’s problems. One of them is the change in demographics. Over the last 40 years, financial incentives and considerable pressure has resulted in hundreds of millions of workers moving from agricultural to urban labor, creating a huge industrialized working class and helping the country to grow in double-digit numbers, literally doubling in size in less than a decade.
And now the country is in trouble. The slowing growth especially in its corporate sector and its over zealousness in investment has left the country in heavy debt rising to over 100% of GDP between 2007 and 2014.
This aging population and a shrinking workforce are coming back to haunt the country and are only a few of the challenges facing Beijing at the moment.
A drop in exports, especially oil, is having a severe effect on the Chinese economy. According to the numbers set out in a report by International Monetary Fund’s World Economic Outlook Database, China’s exports in 2014 amounted to US$2.343 trillion, up 48.5% since 2010. With its total Gross Domestic Product amounting to $17.632 trillion in 2014, total exports for the same period accounted for about 13.3% of China’s total economic output.
Chinese exports fell 8.3 percent in July, its biggest drop in four months and far worse than the 1.0 percent predicted following the 2.8 percent uptick in June. Exports to the European Union fell 12.3 percent in the same period while those to the United States dropped 1.3 percent. Demand from Japan, another big trading partner, slipped 13 percent.
Analysts should not have been taken by surprise by China’s recent moves. The People's Bank of China moved its official exchange rate for the second day Wednesday, effectively allowing the yuan to slip by another 1.9% against the dollar, the biggest single move in a day. The two devaluations together return the Chinese currency to where it was to the dollar in October 2012.
Strategists suggest that the devaluations of the yuan will help boost the economy in the short-term, making the country's exports and investments more attractive and boosting the money supply. They hope this will strengthen the country’s growth.
Macy’s Joins Alibaba
Meanwhile, Chinese markets continue to hold a strong attraction for the U.S. consumers and the Alibaba Group, a Chinese e-commerce company that provides consumer-to-consumer, business-to-consumer and business-to-business sales services via the internet seems to have set the standard for other similar ventures with China.
Macy's Inc., one of the oldest and most popular retail outfits in the United States has been looking for new ways to increase its sales and has now formed a joint venture in China with Hong Kong-based Fung Retailing that will sell products on Alibaba Group Holdings Ltd.’s global marketplace.
The China venture may or may not have come at the right time for Macy’s. Alibaba stock has been dropping steadily and was off 5.1% at $73.40 in Wednesday trading in New York. The stock, which climbed as high as $120 in November, is now just 7.9% above its initial public offering of $68.
China’s biggest online commerce company continues to be popular with online shoppers looking for cheap prices and its local consumers look to Alibaba for electronic gadgets as smartphones become more and more popular.
Many analysts believe that China is capable of meeting all its challenges and point to strong economic fundamentals that should help the country weather the storm. According to the People's Bank of China, “The country's strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provide ‘strong support’ to the current yuan-dollar exchange rate.”
The PBOC added on Thursday that there is no basis for further depreciation in the yuan currency but this may be an effort to reassure skittish global financial markets after it devalued the currency for a second time earlier in the week.
Other sources involved in the Chinese policy-making process say that powerful voices within the government are pressuring for an overall devaluation of close to 10 percent and are pushing for the yuan to continue to drop gradually.
Whatever the final outcome of all its moves, China will continue to hold a larger place in the world economy than it did even one or two decades ago and its successes or failures will have an affect around the world.