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As the economists predicted, the debt crises in Europe and the US are having impact on the global economy. Quite recently China has announced about its slowing growth and potential financial troubles. Dukascopy Bank has interviewed an expert in Chinese economy, Professor Francis Lui, to learn about what is actually going on in China at the moment and what are the second largest economy's growth prospects.
China's economic rule will still continue for quite a long time, although currently it is facing some difficulties in the short run. One of the main difficulties is certainly what has been happening in Europe and the US whose financial crisis is still going on. Western troubles can cause some negative effect on the exports of China, which is why I expect that China finds a way to increase the domestic demand. That is a major problem because there are a lot of manufacturing companies in China and the kind of goods that these companies are producing are usually marked "for exports". The consumer goods that will be needed domestically in China will be somewhat different, so that the exporters will have to find some ways to redesign the products, as well as compete with the manufacturers that have been selling the goods domestically.
However, when they try to go inland, inside the China, all the competitors also would have access to cheap labour, consequently, this kind of comparative advantage that the exporters have been enjoying would disappear. If they cannot succeed, that could cause a lot of unemployment. What the exporters need to improve now is the technology and the products they have been producing, so as to suit the needs of the domestic consumers.
Nevertheless, there is a problem here because of the law of diminishing returns. It implies that if you build the first highway, the contribution from the highway could be important, but if you have already built almost 100 highways, the next one that you will build is going to make a much weaker contribution to the economy.
In my view, China has to spend resources on protecting the environment and also to come up with decrease in production of energy intensive goods.
2) How would you evaluate the situation with the housing boom?
China has been trying to impose a lot of measures to control the housing prices, but I do not think that those policies have been implemented properly. It results in a lot of repercussions in society, having already created quite a bit of negative effect on this year's GDP.
3) What are the prospects for Chinese economy's long-term growth?
Overall, I am still optimistic about the Chinese economy. It has been saving a lot in the past: the savings rate is the highest in the world. It saves about 52% of the GDP and is very different from other countries. China's investment rate, for instance, is 50% of the GDP. It means that for every one hundred dollars produced, Chinese government and private people consume around 48 dollars. The total consumption is about 48%, whereas the other 52% are saved.
And as such, even if there is an economic problem, China may have the resources to deal with it. China has an enormous amount of foreign reserves which amounts to 3.2 trillion US Dollars which is half of the GDP. Due to the fact that the currency in China has been appreciating, therefore, China is losing money because of holding of the large amount of reserves and it needs to handle this difficulty.