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Two Chinese challenges and opportunities

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • China is easing policy. This supports growth and helps offset US trade taxes. China's economy will grow around 6.5% this year. But how will China perform in the long term? Two things need to change.
  • China has had great growth over the past 25 years. Sadly, this growth was not environmentally sustainable. Environmental problems still challenge the Chinese economy today. Pollution has caused health problems. Water shortages mean China cannot grow enough soybeans. (Soybeans need lots of water). Water shortages have hit electricity generation. (Coal-fired power stations need lots of water). China cannot get to its trend growth of around 5% without continuing to improve environmental sustainability.
  • China's growth success came by being part of long, complex global supply chains. This model is ending. Local production and digitization mean supply is changing. The solution is not to "move up the supply chain". Making higher quality parts in a supply chain only works if supply chains still exist. Instead, China needs to be better at innovation to get to 5% growth.
  • The 2018 Nobel Prize for economics did not go to a market economist (again). Nordhaus and Romer won for works on how climate change and innovation affect growth. These are real changes that China must make.