China set to become world’s largest economy this year: QNB

 China is set to become the world’s largest economy in 2014 even as it faces the challenges of advancing to a consumer-based society with open capital markets and a modern financial system, says a new report.

With about $5tn in savings, China has the highest savings in the world, QNB said in its ‘China Economic Insight 2014’.

The report analyses how China is surpassing the US and the EU as the biggest economy in the world and faces the challenges of advancing to a consumer-based society with open capital markets and a modern financial system.

According to the report, China is set to become the world’s largest economy in 2014; it is now the most populous nation (1.36bn people), the largest contributor to global growth and the largest exporter in the world.

China has transformed itself over the last 30 years from a predominantly agrarian economy to the world’s factory, lifting 500mn people out of poverty in the process.

Nevertheless, China remains a middle income country, with the challenge of raising itself to a high–income economy — GDP per capita was just under $12,000 in China in 2013, compared with $53,000 in the US.

Real GDP growth is expected to slow gradually from 7.7% in 2013 to 7.2% by 2016, reflecting an investment slowdown and a recovery of global demand, QNB said.

Private consumption should pick up, encouraged by government policies to open markets and boost spending.

The contribution of public consumption should remain flat as the government expands its education and health services.

A recovery in external demand should support export growth in 2014 and 2015, making the contribution of net exports positive.

Inflation should remain moderate over the medium term as rising domestic demand will be offset by lower imported inflation.

China is implementing a package of reforms to boost consumption, reduce the savings rate and thereby raise GDP per capita towards advanced economy levels.

With about $5tn in savings, China has the highest savings in the world; unleashing these savings should generate growth in consumption, helping to raise GDP per capita towards advanced economy levels, with estimates that China will catch up with US per capita income by 2050.

The main systemic risks relate to a slowdown in the real estate sector, which is connected to excessive leverage in shadow banking and high local government debt.

“Shadow banking is mushrooming as a means to circumvent restrictions in traditional banking; regulations have pushed banks off balance sheet to generate growth.

Shadow banking lacks regulatory oversight; investors have come to assume many government-related products sold by shadow banks are backed by an implicit guarantee, thus increasing the potential risk of default,” QNB said.