China’s Economy Under Pressure, Incentives on the Horizon

China’s economy is under pressure, admitted Premier Wen Jiabao, and this has led to apprehensions among investors on whether to invest in the country.

According to reports, slowing property movement has been instrumental in bringing the growth rate to 7.6 percent in the second quarter - lowest since 2009 at 7.6 percent. But compared to other economies, at present China’s growth rate is better, though it is set to decline in future believes experts.

In an article "Massive Inventory Build-up in China Troubling for the Global Economy," Sasha Cekerevac, wrote in Profit Confidential that the massive inventory in China has largely contributed to decline in growth rate, which is exerting pressure on the global economy. Cekerevac writes that as the second largest economy, what happens to China’s growth rate has an impact on the global economy.

“One of the biggest worries…is that massive levels of inventory are being built up and unsold,” Cekerevac wrote. “It seems as if there is an immense oversupply and a glut of inventory in every industry… If inventory is sitting unsold, this means that there will be lower levels for China’s growth rate going forward. The global economy needs to work off the existing inventory.”

However, this takes time and “China’s growth rate will not be as robust as it has been over the past few years, as the economy needs to work off this excess supply,” she said.

On the financial front, though institutions are trying to renew lending, demand for domestic loans has dropped, Cekerevac writes. “On top of a lack of demand, bad loans held at Chinese banks have risen for the third consecutive quarter. This is the longest stretch of bad loan increases in eight years.”

Government Initiatives

Meanwhile, to cushion the effects of weakening economy, the government initiated various measures such as reducing interest rates and fast-tracking construction projects.

According to a report in the Business Standard, 55 investment projects worth $158 billion were approved by China’s top economic planner last week. This money will be consumed to build highways, ports and railways across the country, the report said.