Professor of Economics, Associate Dean for Asia and Europe, Director of the Case Center, Director of China Economy and Sustainable Development Center
PhD, University of Michigan
Corruption, Financial Markets, Macroeconomics, Managerial Incentives and Market Competition, Real Estate, Reform, Taxation, Telecommunications Privatization, Valuation in Emerging Markets
Having delayed serious structural reforms, China faces eye-watering overcapacity in heavy industries. Steel production volume is more than double that of the next four leading producers combined: Japan, India, the United States and Russia. Aluminum production capacity reached 40 million tons last year, exceeding global consumption by 9 million tons. Most remarkably, between 2011 and 2013 China produced more cement than the US did during the entire 20th century—6.6 gigatons, compared to the US’s 4.5. What can China possibly do about this excess capacity that is weighing on the balance sheets of debt-ridden firms reeling from China’s economic slowdown?
How do Chinese companies view the next few months? The CKGSB Business Conditions Index registered 59.3 in April, falling slightly on March’s overall index of 59.7. This shows that for the survey’s sample firms, of which the majority are relatively successful in China, the next few months are being viewed with some optimism. The CKGSB Business Conditions Index comprises four sub-indices for corporate sales, corporate profits, corporate financing and inventory levels. Corporate sales fell slightly from 74.5 to 73.1, while the profit index rose from 58.9 in March to 61.5 in April. With the sales forecast falling and the profit rising, this shows that cost expectations are improving.
Everyone in the world is concerned about how the Chinese economy is faring and understandably so. China’s linkages with the world mean that the health of the Chinese economy has a bearing on other economies as well. The CKGSB Business Conditions Index, based on a survey conducted each month, gauges business sentiment about the macro-economic environment among successful Chinese business executives. In January, the Index showed that for most relatively successful firms in China, optimism about business conditions over the next six months is waning, and executives are at best cautiously optimistic.
The heady days of double-digit economic growth rates are now history in China, and even achieving 7-7.5% growth is unthinkable. The stock market has been on a roller coaster ride. The Renminbi has fallen dramatically and the trade numbers are down too. Li Wei, Professor of Economics at CKGSB, feels that to solve this China must implement structural reform. The downside: it will be painful. The upside: the Chinese economy will be better off in the long run.