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China’s Economic Model Faces Some Serious Threats

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Jul. 17 2019, Updated 7:14 a.m. ET

China’s economic model

China (FXI) became the world’s second-largest economy due to strong economic growth in the last few decades. The country saw double-digit growth a few years ago due to massive infrastructure investments and a rapidly growing export sector. According to Trading Economics, China’s economic growth averaged 9.61% between 1989 and 2018. However, the country’s economic growth has cooled off. China’s economic growth increased at an annualized pace of 6.7% in the second quarter. The US economy (SPY) grew 4.2% in the second quarter.

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Key pillars

China’s economic miracle, which was built on two key pillars of higher government infrastructure spending and allegedly subsidized exports, is facing headwinds. China’s fixed investment growth rates have fallen. The country is trying to steer its economy from an investment-led economy to a consumption-driven economy. China’s exports are facing a backlash from several countries apart from the US. Steel and aluminum are a case in point. In steel, China’s massive overcapacity has earned the ire of G20 nations. Previously, China agreed to cut its steel overcapacity. China’s steel exports declined after the country cut some of its steel capacity. Steel companies like U.S. Steel Corporation (X), AK Steel (AKS), and Nucor (NUE) benefit from lower Chinese steel exports. In aluminum’s case, China’s overcapacity was mentioned at the G7 meeting in Canada.

Export sector

Chinese exports are facing a backlash in several countries. China’s fixed-asset investment and property sector might not grow at the pace we saw in the last decade. China was trying to move up the value chain in manufacturing. However, China faces an ongoing trade war with the US.

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