China's Growth after Slowdown

Why in news?

The Chinese economy grew at 6.4% in the first quarter of the current year, much faster than what was expected.

What are the recent developments?

In the recent period, the Chinese economy has been slowing down, facing a host of challenges which included -

But China’s economy is now showing signs of a rebound.
This rate of growth is equal to the pace registered in the December quarter and faster than expectations of a 6.3% expansion.
Retail sales and factory output showed strong growth momentum.
Chinese exports reached a five-month high in March, rising 14.2% when compared to the same month last year.
China's stock market has also been driven by the early signs of an economic turnaround and increased liquidity.

What does it imply?

The latest growth figure is an indication of the positive effect of Chinese government’s efforts over the last few quarters to stimulate economy.
Total social financing grew by almost 40% to 8.2 trillion yuan in the first quarter of the year.
It points to a credit expansion that will boost growth in the coming quarters.
With trade tensions with the U.S. subsiding significantly for now, export growth may accelerate and further boost the economy.

What is the need for caution though?

Gross domestic product growth is generated largely by increased lending.
China, of late, has once again been encouraging its banks to boost lending to public and private businesses.
This is being done apart from implementing various fiscal measures to boost consumer spending.
However, it poses the risk of losing momentum once the stimulus is withdrawn.
This is because businesses may resort to heavy borrowing when credit is easily available.
But they soon become burdened with disproportionately high amounts of debt once the economic boom cycle reverses.
The country may eventually be forced to crack down on excess lending by banks when the economy is under burden.

How does the future look?

The Chinese government is now walking a tightrope as it attempts to keep the momentum only from slowing in the short term.
Meanwhile, market forces are trying to correct imbalances within the economy.
Any macroeconomic policy focussing too narrowly on the short term and ignoring the long-term consequences is risky.
It does not bode well for either the Chinese economy or the wider global economy.

Source: The Hindu

Author: Shankar IAS Academy Thiruvananthapuram