Resilience and Risks of China’s Economy

A year ago， economic forecasters at home and abroad bet on sharp depreciation of the renminbi， or the yuan， in 2017 due to a flagging economy and U.S. rate hikes. But the Chinese currency roaring back in the past months has proven them wrong.

The yuans midpoint saw a substantial increase to 6.6770 against the greenback on August 11， the strongest in more than 10 months， following a steady strengthening streak since the beginning of 2017. Onshore and offshore rates were also much fi rmer.

While curbed capital flight and the weaker U.S. dollar were considered the immediate cause， the countrys economic resilience played a fundamental role in propping up the currency.

China posted a forecast-beating GDP increase of 6.9 percent in the second quarter of the year， flat with that of the January-March period， despite expectations of a loss in momentum. From buoyant factory activity to robust imports， latest indicators have disappointed doomsayers.

“Once again， the Chinese economy has defied the handwringing of the nattering nabobs of negativism，” Stephen Roach， faculty member at Yale University， wrote in an article on Project Syndicate， an international media organization that publishes and syndicates commentary and analysis on a variety of important global topics.

Consumption power

Roach said deeper issues， namely reforms， were overlooked by pessimistic analysts. “The Chinese economy is in the midst of an extraordinary struc- tural transformation—with a manufacturing-led producer model giving way to an increasingly powerful services-led consumer model.”

The transition is being briskly pushed forward by Chinas middle class， a growing group generous in spending and fastidious in quality that will likely dominate the demographic structure in the coming decades.

Homi Kharas， now with the Brookings Institution， predicted in an Organisation for Economic Cooperation and Development working paper that China will add 850 million to its middle class by 2030， which means the group will account for 73 percent of the population. In contrast， Europe will add only 16 million， and North America will see a decline of 16 million.

The trend forecast by Kharas will reshape the landscape of both China and the world. “China will have a $9.7-trillion consumer market by 2030， the largest in the world，” according to a lengthy report by Morgan Stanley， which predicted the worlds second largest economy will have become a highincome country by that time.

While the forecast picture has yet to materialize， preliminary effects have already been felt. Consumption contributed 63.4 percent of economic expansion in the first half of the year， outshining the old engines of investment and exports.

Innovation-inspired miracle

Encouraged by robust domestic demand and dissatisfied with churning out unprofitable， inferior small wares， Chinese companies are striving to climb up the industrial value chain to master the technology essential for creative， quality products.

In terms of output， hi-tech and equipment manufacturing expanded 13.1 percent and 11.5 percent respectively in the first half of the year，outpacing the 6.9-percent increase of the broader industry. Emerging sectors including new energy and new materials also picked up speed.

From high-speed trains to shared bicycles and mobile wallets， Chinese innovation is shaking up the global tech world and peoples daily lives.

China moved up the list of the worlds top 25 innovative economies， rising three notches from 25 to 22， according to a key innovation index jointly released in June by the World Intellectual Property Organization， Cornell University and INSEAD.

The country was top in a number of subrankings， including domestic market scale， human resources， patents by origin， hi-tech exports and industrial design by origin.

Despite a slower growth pace， the China miracle is not over， but has entered its second phase， focusing on consumption， technology and innovation， advanced manufacturing and services， Michael Zakkour， vice president of China practice at the global consulting firm Tompkins International， said in an article on Forbes.com.

Lingering risks

Despite the bright prospects， risks still loom for the economy in transformation.

Roach highlighted mounting corporate debt and the volatile housing market and accordingly called for reforms in state firms and proper regulation over the property sector including ensuring housing demand is met and restraining speculation.

Analysts also warned of risks from fiscal deficits and trade frictions with the United States.

Fully aware of the challenges， Chinas policy makers have rolled out a series of measures， reining in credit expansion and curbing the overheated residential real estate sector. Debt-ridden “zombie companies” are being dissolved， and the housing market is gradually getting back on track.

“The risks are generally controllable，”Chinese Premier Li Keqiang said at the Annual Meeting of the New Champions 2017， or Summer Davos， in Dalian， northeast Chinas Liaoning Province. “We are capable of fending off all kinds of risks and ensuring the economic growth stays in a reasonable range.”