China- Current State of the Economy and What Lies Ahead

CHINA- CURRENT STATE OF THE ECONOMY AND WHAT LIES AHEAD. Introduction This paper covers the basic aspects of the Chinese economy. The paper is designed to be simple and lucid. Wherever there is usage of financial terms, they are explained in detail to make the reader comfortable with those terms. Therefore, readers are advised to read the paper to easily gain an insight into the Chinese economy – How it is functioning now and what lies ahead? China, a communist nation in East Asia, is the world’s most populous country. Its largest city, Shanghai, is a skyscraper-studded global financial centre. SNAPSHOT OF THE CHINESE ECONOMY AND ITS COMPARISON WITH INDIA GDP

CHINA GDP 10.86 TRILLION $ (2015) INDIA GDP 2.07 TRILLION $ (2015) source - http://data.worldbank.org/country/china The GDP of china touched 10.86 Trillion dollars in 2015. For those who are not comfortable with the term, the term GDP is explained below:- GDP, or Gross Domestic Product is the most important of all economic statistics as it attempts to capture the state of the economy in one number. Quite simply, if the GDP measure is up on the previous three months, the economy is growing. If it is negative it is contracting. And two consecutive three-month periods of contraction mean an economy is in recession. As evident from the graphs above we can see that the Chinese economy is almost 5 times the size of the Indian economy in spite of a minor population gap between the two nations. However china’s growth has begun to slow down lately. China's economy grew at an annual rate of 6.7% in the first quarter of the year, says the government. It is the slowest quarterly growth in the Chinese economy in seven years, but in line with expectations and China's own growth targets. In the final quarter of last year, the economy expanded by 6.8%.To tell the truth China correspondents struggle with this country's economic statistics because we don't know how accurate they are and GDP figures are no exception. Some provinces and companies are said to exaggerate their production figures to push themselves to the top of the pile but there are also those who are thought to under-estimate their performance so they can attract greater central government support. For this reason there are economists who measure this country's financial health using electricity consumption figures instead. By this measure the world's second largest economy would still be growing but perhaps at not at such a rapid clip. Asia's economic giant is attempting to make up for a loss in traditional production and exports by shifting to a model much more dominated by services and domestic consumption. It is in the process of sacking millions of workers and looking for somewhere else to place them. This might be the correct thing to do in the long run - the government would argue that it is working to eventually deliver more sustainable growth - but, in the short term, what it means is more pain to come. India on the other hand is expected to grow at 7.9% which is slightly more than the Chinese economy, however it must be noted that the Chinese GDP is almost five times of Indian GDP. POVERTY INDIA Poverty headcount ratio at national poverty lines (% of population) for INDIA IS 29.50 % Source- http://data.worldbank.org/ Despite the India’s meteoric GDP growth rate, poverty in India is still pervasive; especially in rural areas where 70% of India’s 1.2 billion population live. It is one of the fastest growing economies in the world and yet its wealth is hardly redistributed across the population. The graph below shows the comparison of Indian poverty rate with other countries of the world.

CHINA No data on poverty is available for china on the World Bank website. Primary reason for this could be the stringent censorship norms that the government has implemented in the country. However, data from other sources indicates that that China has all but eradicated urban poverty. For a country with huge numbers of poor people streaming into its cities, many of whom living initially in conditions of abject misery, this is an extraordinary success. It has been achieved, in large part, because of a government subsidy paid to urban dwellers to bring incomes up to a minimum level of 4,476 yuan ($700 or £446).

CHINA’S SHIFT FROM A MANUFACTURING BASED ECONOMY TO A SERVICE BASED ECONOMY There is no doubt that China has been one of the main engines of global growth in the last three decades. Essential to this economic success story has been China’s role as “the factory of the world.” Their reliance on export-dependent manufacturing is, however, coming to an end. As China moves away from a manufacturing-driven economy to a more consumption and service-driven model, Chinese companies will have to find new ways of managing and motivating their employees. A manufacturing-driven economy has different requirements than a service-driven one and thus brings forward the question whether the incentive systems used to motivate employees in the former model will still work in the later model. A manufacturing model motivates employees through tangible financial means, often a one- to-one relationship: the more you get paid, the better you will perform and thus produce. This approach often prioritizes quantity over quality. In the past, this belief was very much reflected in China’s customers’ preference for lower-quality but cheap products. Moreover, this type of incentive system to motivate employees also aligned well with the more traditional management structures in Chinese companies where decision-making is centralized and leadership is equated to a large extent with adhering to quotas and other pre-established criteria. A service-driven economy, however, faces different demands and requires a different approach to incentive systems. In a service-driven economy, customers cannot be lured in with cheap, low-quality offerings. Now, customers will demand high-quality products, and for that they are willing to pay more. To differentiate your company, it thus becomes necessary to communicate to customers why you are in the business of selling this particular product and what value it brings to the customer. This shift changes the kind of incentives required. China’s massive transformation towards a service-driven economy ultimately rests on its workforce. A manufacturing economy has different requirements than a service economy. To deal with this challenge, one important focus for Chinese companies will be to train, educate, and incentivize their work force in ways that develop a pro-active attitude motivated by an intrinsic desire to create long-term customer value.

Compiled By:- Shivanshu Naithani