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Asia

The good and bad of China's economy in 2015

The Chinese economy this year has been marked by slackening growth and a stock market meltdown. But the Asian giant also scored successes in its attempts to become a major global financial player.

In the middle of this year, the downturn in China - with expansion rates dropping to their slowest pace in over two decades - prompted many to question the ability of the Communist leadership to steer the world's second-biggest economy and put it on a sustainable growth path.

The weakening GDP growth also raised doubts about the leadership's political will to remain steadfast in its commitment to reconfigure the nation's economy from one reliant on exports to a model driven by domestic demand.

Then came the stock market meltdown, starting in June, followed by the authorities' bungled response to tackle the rout. Despite the slump in share prices on Shanghai and Shenzhen stock exchanges wiping out about $3.5 trillion in market capitalization, many analysts argued that it was not a big problem due to the relatively smaller role stock markets play in China's real economy.

A panicked response

However, the actual problem was the knee-jerk reaction with which the Chinese leadership dealt with the stock exchange crash.

The government cut interest rates, encouraged stock purchases, imposed a ban on IPOs, and arrested traders to stop the sell-off, which from mid-June to early July had erased 30 percent of the market value.

Notwithstanding the aforementioned measures, the stock markets again plunged in early July. In the following months, shaky Chinese stock markets would continue to be a source of concern for investors worldwide.

Chinese Premier Li Keqiang addresses the Malaysia-China High Level Economic Forum in Kuala Lumpur, Malaysia, Nov. 23, 2015 (Photo: Xinhua/Gao Jie)

The stock exchange crash put the reputation of PM Li and President Xi at stake

But what is the reason behind this frantic response by Chinese officials, despite the stock markets not playing a critical role in the overall performance of the nation's economy?

The Economist, a British media outlet, gives the following explanation: "When the stock market was soaring, the press cheered the bull run as an endorsement of the economic reforms of the Xi-Li team. Now that it is falling, regulators want to shore up the leadership's reputation."

That reputation rests on stable growth even more than on profitable stock investments. So when third quarter growth was announced to be only 6.9 percent, the lowest increase since the 2007-08 global financial crisis, there was again concern about a hard landing of China's economy.

The Chinese leadership, however, insists that a 6.5 percent expansion rate over the next five years would be sufficient to create a "society of moderate prosperity," as well as double the nation's GDP and per capita income by 2020.

Nevertheless, it is unclear whether Beijing would be able to achieve this growth target while, at the same time, restructuring its economy - making it less dependent on exports and manufacturing, and driven more by consumption and services.

Experts believe China's re-balancing is certainly not going to happen in the short run. For instance, analysts at the Berlin-based Mercator Institute for China Studies (MERICS) say: "For months, Chinese imports have been decreasing at a much faster rate than exports, thus the trade surplus has continued to rise. An even trade balance, reflecting more consumer-oriented growth, is clearly not in sight."

A successful strategy

Regardless of the growth figures, however, China can boast a number of successes in 2015 in the areas of technology and international cooperation. This includes the launch of China's first medium-haul jet C 919, which could emerge as a serious competitor to planes made by Airbus and Boeing.

In addition, the International Monetary Fund's (IMF) recent decision to admit renminbi into its Special Drawing Rights (SDR) basket of currencies, alongside the US dollar, the pound sterling, the Japanese yen and the euro, elevated the global standing of the Chinese currency.

"The inclusion of the renminbi in the IMF's currency basket has a great symbolic value. It is an acknowledgement from the IMF that China is set to become a leading power in the world monetary system," analyzes MERICS, adding that this success would provide China's policymakers "a good chance to continue the transformation of the financial system and thus set the course for China's economic structural change."

China also marked a major international success by establishing a new global financial institution, the Asian Infrastructure Investment Bank (AIIB), in Beijing.

The bank is touted by some as a potential competitor to western-dominated financial institutions such as the World Bank and the Asian Development Bank. But that hasn't stopped countries like Germany and the United Kingdom from joining the AIIB, despite Washington's opposition.

Britain's Queen Elizabeth and the President of China, Xi Jinping, are driven by carriage along The Mall to Buckingham Palace in London October 20, 2015 (Photo: REUTERS/Yui Mok/Pool TPX IMAGES OF THE DAY)

British authorities gave a spectacular reception to President Xi in October

Investment offensives

While China aims to promote its development projects in poorer Asian countries through the AIIB, it is also seeking to become a major global investor - by funneling billions of dollars into projects across sub-Saharan Africa, Asia and Latin America.

Meanwhile, Beijing is investing in developing an "economic corridor" in Pakistan that would grant it access to the Indian Ocean.

In October, the British government gave a spectacular reception to President Xi Jinping - a gesture slammed by a number of activists due to Beijing's dismal human rights record. During Xi's visit, both countries inked deals aimed at opening doors for Chinese investment into the British nuclear industry. While it starts with Chinese capital, it is likely later to include Chinese technology.