We have watched the Chinese economy explode with annual GDP growth in the double digit arena over the past two decades to where China surpassed the U.S. in 2014 to become the largest world economy by producing over $17.6 trillion in terms of goods and services. Just 14 years earlier the U.S. produced nearly three times as much as the Chinese. At the end of the day, China accounts for approximately 16.5% of the global economy versus the U.S. with 16.3%. However, it is important to note that although China`s economy may be the world`s largest it`s still not the richest. GDP per head is still less than a quarter of U.S. levels.
Optimism about the Chinese economy came to an end following a stock market sell off on August 24, 2015 (Black Monday) that saw the Shanghai Composite fall 8.5% (its worst single day performance since 2008). As illustrative of the role China now plays in the global economy, the U.S. Dow declined 1,000 pts., the Tokyo Nikkei-225 recorded its biggest drop in more than two years, falling 4.6%, Britain`s FTSE 100 was down more than 4.5%, the Stoxx Europe 600 index fell 5.3% and the German DAX lost 5%.
Overall, these declines stripped tens of billions of dollars in value from European companies
Following this dramatic negative occurrence, the Chinese economy continues to struggle amid continuing uncertainty, as labor unrest and lagging GDP growth spread throughout the entire country. As businesses, factories and financial services firms grapple with the new economic reality in China, economists disagree on the nation`s fiscal outlook. The IMF feels that China is at [a crucial juncture" in its development path and needs to show more urgency in reforming its economy. The IMF expects China to expand by only 6.0 percent next year (2017) while the majority of other economist predict a continuation of 2016 performance (i.e., 6.5% - 6.7%) – see Figure 1.
Many economists believe that China`s GDP growth is set to decelerate to +6.7% in 2016. Exports most likely would remain a drag on growth this year with a modest demand expansion in the U.S., the European Union and weak new orders from large emerging markets. Private investment will grow at a slower pace limited by a high corporate debt and ongoing overcapacity reduction. Much of China`s economic problems stem from overcapacity in a number of industries combined with high inventory levels.
