By Kevin Belanger,
International Business Writer
According to the latest economic information from China, the Chinese economy in 2014 grew at a rate of 7.4 percent, its slowest rate since 1990. This growth rate falls below the Chinese government forecast of 7.5 percent. According to the International Business Times, this is the first time since 1998 that the Chinese economy has failed to meet its forecasted growth rate. Following the release of this information, Chinese Premier Li Keqiang spoke at the World Economic Forum in Switzerland in an effort to ease international concern about the Chinese economy. In his speech he explained that the Chinese government wishes to transition to an economy with slower, higher quality growth.
Reuters reports that this change may be necessary because the Chinese economy has largely been driven by investment, especially in the housing and construction sectors. However, consumer demand has not kept pace with investment, potentially creating a surplus of supply.
This has led to investor fears of “ghost cities.” Cities such as Ordos, in Inner Mongolia, were designed to house over one million people. However, there simply is not enough demand to fill these cities, especially because the apartments being built are often meant for wealthy citizens, not poor migrants. Chan Hin-Ling, a professor of Economics at Baptist University in Hong Kong argues that China will not be able to stimulate its economy by investing because this will only further increase the oversupplying of the market.
Oversupply also presents a serious problem to construction investors, many of whom have financed developments with foreign debt or through the Chinese shadow banking system. Without demand for their products, they face possible default and economic hardship. While home prices have risen slightly, development of new homes is at a five year low, indicating that investors are cooling to the idea of investing in development.
In addition to lower prospects for growth, the government has also recently taken efforts to rein in pollution by creating new laws restricting pollution and more stringently enforcing existing laws. While Xu Xinpeng, a professor at Hong Kong’s Polytechnic University, believes that such change is important to China’s future, he does acknowledge that increased regulation of pollution could hurt China’s thriving manufacturing industry. However, if the trend of urbanization continues, new city populations will require the service sector to grow, possibly creating new jobs, according to Larry Chu of the University of Hong Kong.
This economic news comes on the heels of a World Bank report released in 2014 which cut expectations for economic growth in East Asia. In this report, the World Bank also predicted that China would need to stabilize its economic policy, which would reduce the speed of growth.
However, despite worries about growth, the Chief Economist of the International Monetary Fund believes that the lowered growth is a signal that China is making a serious effort to reform its investment and export driven economy to one that is more consumer driven.
Darius Kowalczyk, an analyst for Credit Agricole, believes that the Chinese government will cut interest rates in an attempt to boost the economy. However, other analysts believe that there is too much debt in the Chinese economy and thus banks will not be willing to invest in new projects.
A version of this article appeared in the Tuesday, January 27th print edition.
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