The Dragon economy starts to slow

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China has been the world’s fastest growing major economy since 1978, when it embarked on a series of reforms that were characterised by increased receptiveness to foreign investment, privatisation of state industry, investment in infrastructure and easing of state control.

The remarkable growth that this reform catalysed has been the most important economic story of our times. In the past thirty years, China has lifted more than 500 million people out of poverty, a hitherto unprecedented number in world history. Earlier this year, China once again became the world’s largest economy (by purchasing power parity), a position it had previously enjoyed for several centuries until the industrial revolution established the dominance of the West.

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However, the rise of China has slowed down in recent times and the sustainability of its rapid pace of growth has been called into question. For several years, China’s Gross Domestic Product (GDP) grew consistently at annual rates of around 10%, but GDP growth fell to a five year low of 7.3% last quarter, down from a previous World Bank estimate of 7.6%. Following Goldman Sachs’ forecast last month, the World Bank has also cut down growth forecasts for the next two years, from the official government target of 7.5% to 7.2% and then 7.1% respectively.

These figures might still seem respectable, especially in comparison to developed economies that are struggling to achieve far lower growth rates. Indeed, the Chinese President Xi Jinping has accepted these revised growth figures as ‘the new normal’ and the Chinese government does not seem likely to provide any substantial incentives to revive the faltering growth rate.

But the slowdown needs to be taken in context. First, it is worth remembering that China’s GDP per capita is still low, at $6,800 per person as compared to $53,000 in the USA and $39,000 in the UK. For China to become a developed nation in the near future, it is vital that it maintains high rates of growth until its income levels are far greater. Developed Asian economies like Japan and South Korea, for example, sustained accelerated rates of economic growth until they had achieved a far higher GDP per capita.

Also of concern is the fact that China’s economic slowdown is due to alarmingly high debt that currently stands at 251% of its GDP, and continues to accrue at nearly double the rate of GDP growth. In most countries, such high levels of debt would have been disastrous. But in China, the risk of economic collapse is contained by the fact that finance is still heavily state-regulated and the government is likely to provide generous bailouts in order to pre-empt financial catastrophe.

Adding to China’s woes is its floundering property market. Accounting for 15% of China’s GDP, the property market has experienced a steady fall in prices over the past year with supply outstripping demand and desolate ‘ghost town’ developments being left entirely unsold. This has been primarily attributed to the Chinese government’s measures to control house prices by imposing limits on buying second homes and increasing down-payment requirements.

China’s manufacturing and export sectors, key drivers of its growth, have also experienced a slowdown due to reduced demand from the USA and Eurozone. The government hoped to offset a drop in exports with increased domestic demand for manufactured goods, thereby making the country more self-reliant. Unfortunately, lack of real estate activity has caused a drop in domestic demand. This has only served to exacerbate the slowdown. Government initiatives to increasing accountability and reduce corruption have further deterred manufacturing growth.

The repercussions of China’s tapering growth story extend beyond its borders. China is not only a key driver of growth in Asia, it is also the world’s largest trading nation in goods. For several countries, China is their most important bilateral trading partner and a slowdown in the Chinese demand will be a cause for concern.

Commodity producing nations, who are largely reliant on China’s demand for coal, iron ore and steel amongst other resources, would be the worst hit. These include countries as diverse as South Africa, Chile and Australia, all of whom consider China as a key export market. Countries with a current account deficit would be especially vulnerable to withdrawal of Chinese demand. Conversely, the fall in commodity prices due to decreased Chinese demand could benefit other emerging economies such as India and Turkey, which are also net commodity importers.

The Chinese slowdown could have worrying repercussions for the EU as well. China is Germany’s third most important trading partner and it has previously exhibited a voracious demand for high-end German exports. But faltering growth could cause Chinese demand for German goods to fall, adding further fuel to worries that Europe’s economic powerhouse could be heading back into recession.

Yet, despite all the gloom and doom surrounding its latest growth figures, China’s prioritisation of structural reforms over extreme economic growth is largely commendable. The Chinese cabinet proclaimed that it would “let restructuring and reform play an active role in stabilising growth”. New policies aim to reduce pollution and unsustainable energy consumption, allow for more transparent financial transactions and cut down on corruption. Soon after this announcement, the cabinet pledged that it will not allow growth rates to fall drastically.

The government has unveiled ‘micro-stimuli’ such as targeted investment in infrastructure and tax rebates for small companies. In the coming years, striking this delicate balance between commitment to reform and support of economic growth will be crucial not only for China’s sustainable development but also for economic health of its many trade partners.

Photo credit: bseplus

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Vishala Ramswami is a Business Administration student. She writes about politics – both national and international, business, science, society and University of Bath issues.

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