The recently released report by the Organization for Economic Cooperation and Development (OECD) titled “OECD Economic Surveys: China 2017 Report” paints an ominous picture of the threats facing China’s economy.
The OECD is particularly concerned with the high level of debt in proportion to overall GDP within China. Furthermore, the engines of investment and exports, which propelled the Chinese economy to world-leading rates of growth, are starting to run out of steam.
{mosads}The OECD reports outstanding debt within China exceeds GDP by 250 percent. The debt figure is comprised of corporate, governmental and individual debt. By any standard, this figure is very high. The largest component of debt resides in the corporate sector with total debt in excess of 170 percent of GDP.
The above figures indicate that instead of dialing back its credit-fueled growth, China has continued to rely on credit expansion as a means of meeting GDP growth targets. Over the past year, a good deal of this credit was injected into the state-owned sector as well as continued investment in infrastructure and related construction.
Realizing China’s high reliance on investment and exports to drive its GDP, reform-minded policymakers have tried to steer the economy in a different direction. Critics, both internally and externally, have cited the fundamental unsustainability of its growth model.
Much of the growth has been reliant on two things — debt and global demand for its exports. Excessive debt increases the overall risk within the economy with the consequential increase of default risk while the demand for China’s exports has lagged the supply of exportable goods.
To rebalance the economy, Chinese policymakers wish to emphasize a shift toward technologically-driven innovation over low-end manufacturing as the path toward sustainable growth. That China is currently caught in the “middle income trap” describes the limits of using cheap labor and conversion of raw materials as a driver of growth.
First off, labor is no longer cheap in China, and the costs of inputs and raw materials have escalated, placing limits on the reliability of this as a driver of growth.The OECD report indicates that much of the well-intentioned policy and incentives to accelerate technologically-driven innovation have fallen short of expectation.
For China’s leaders, it is much easier to talk about innovation than to achieve it in practice. While China has been leading the pack in filing patents, much of what has been patented is of little practical use or worthy of adoption. This state of affairs begs the question, can innovation be cultivated by governmental dictate or is innovation derived from a unique set of circ*mstances, both governmental and non-governmental?
Critics of China’s model of innovation cite the absence of intellectual property protection, a rigid educational system that emphasizes rote memorization, the lack of internet access and free flow of information and the vetting of ideas that in some manner “offends” conformist political ideology as barriers to intellectual thought and the pursuit of innovation.
To be fair, it is not as if China and the Chinese are not inventive people. Take a ride on their high-speed rail trains and you will marvel at the technology and innovation that was applied toward this famously splendid system of transportation. In many ways, large and small, China has made great leaps in technological advancement and material progress.
That being said, China also has a way to go if it is going to match the sheer inventiveness of the United States or Western Europe. If there is any bright spot in the Western economies, it is the ability of these economies to innovate and find new ways of doing things, creating new industries along the way.
It is the productivity gains that result from such innovation that have been the driving force of the United States. So long as we do not screw this up, progress should continue into the future.
Technological advancement and innovative breakthroughs require a host of complimentary activities and institutions to support its growth. Many of these tangible and intangible elements are simply absent in modern-day China.
Arthur Dong is a professor of strategy and economics at Georgetown University’s McDonough School of Business.
The views expressed by contributors are their own and not the views of The Hill.
Copyright 2024 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
FAQs
Key Partners. The OECD works closely with some of the world's largest economies: Brazil, China, India, Indonesia, and South Africa, who are OECD Key Partners. They participate in the OECD's daily work, bringing useful perspectives and increasing the relevance of policy debates.
What remedy does the IMF recommend to China for controlling the high level of corporate debt? ›
First, the government should make a high-level decision to stop financing weak companies, strengthen corporate governance, mitigate social costs and accept likely slower growth in the near term. It needs buy-in at every level—state-owned enterprises, local governments, and financial supervisors.
Does China have a lot of debt? ›
Corporate debt adds another 123 per cent of GDP worth of liabilities, a large chunk of which is owed by state-owned enterprises (SOEs) [2]. In addition, household debt - mostly mortgages - is 61 per cent of GDP. Altogether, China's gross national debt is over 300 percent of GDP.
What is the current status of the Chinese economy? ›
China is now an upper-middle-income country. Although China has eradicated extreme poverty in 2020, an estimated 17.2 percent of the population lived on less than $6.85 a day (in 2017 PPP terms), the World Bank's Upper-Middle-Income Country (UMIC) poverty line, in 2023.
Why is China not in OECD? ›
China is not a member of the OECD because it is not a developed country in terms of its GDP per capita.
What is the OECD forecast for China? ›
copy the linklink copied!China. Economic growth will rebound to 5.4% in 2023 and 5.1% in 2024.
Who holds most China debt? ›
In addition, most of the debt is state owned – state-controlled banks loaned funds to state-controlled firms – giving the government the ability to manage the situation.
Which countries owe the most debt to China? ›
20 Countries Most in Debt to China
- Belarus. ...
- Cambodia. ...
- Ecuador. ...
- Nigeria. ...
- Egypt. ...
- Lao People's Democratic Republic. Total External Debt to China (2022): $5.25 billion. ...
- Bangladesh. Total External Debt to China (2022): $6.05 billion. ...
- Zambia. Total External Debt to China (2022): $6.08 billion.
Impact of China Buying U.S. Debt
Chinese loans to the U.S., through the purchase of U.S. debt, enable the U.S. to buy Chinese products. It's a win-win situation for both nations, with both benefiting mutually. China has a huge market for its products, and the U.S. benefits from the economic prices of Chinese goods.
Is China's debt worse than the US? ›
China's debt overhang far exceeds the burdens facing the United States. As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.
The United States pays interest on approximately $850 billion in debt held by the People's Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.
Is China's debt higher than the US? ›
Debt as a share of GDP has risen to about the same level as in the United States, while in dollar terms China's total debt ($47.5 trillion) is still markedly below that of the United States (close to $70 trillion). As for non-financial corporate debt, China's 28 percent share is the largest in the world.
Which country has the largest economy in the world? ›
With a GDP of more than 20 trillion dollars, the United States of America is the world's largest economy.
What is the fastest growing country in the world? ›
Guyana registered the world's highest real GDP growth rate in 2022, with its national output 62.4% higher. Driven by its booming oil sector, the economy is set to expand by 27.2% in 2023 and 34.2% next year — consolidating the country as the world's fastest-growing economy in 2024.
What is life like in China for the average person? ›
It's exhilarating and infuriating, but, overall, offers many amazing rewards. Here, you'll face cultural and language barriers, enjoy delicious meals, travel often, navigate bureaucracy, make money, and experience a wonderful standard of living, far superior to what you'd have at home.
When did China join the OECD? ›
Represented by the Development Research Center (DRC) of the State Council, China became a member of the OECD Development Centre in July 2015.
What countries are not in the OECD? ›
Region 9—Other non-OECD Europe and Eurasia: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Faroe Islands, Georgia, Gibraltar, Kazakhstan, Kosovo, Kyrgyzstan, Latvia, Lithuania, Macedonia, Malta, Moldova, Montenegro, Romania, Serbia, Tajikistan, Turkmenistan, Ukraine, ...
Who are the 38 OECD countries? ›
The OECD's 38 members are: Austria, Australia, Belgium, Canada, Chile, Colombia, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak ...
What are the 35 countries of the OECD? ›
- Australia Austria Belgium Canada Chile Czech republic Denmark Estonia Finland.
- France Germany Greece Hungary Iceland Ireland Israël Italy Japan.
- Korea Latvia Lithuania Luxembourg Mexico Netherlands New Zealand Norway Poland.
- Portugal Slovak Republic Slovenia Spain Sweden Swistzerland Turkey United Kingdom United States.
