Chinese Economic Slowdown Reverberates Globally

Chinese Economic Slowdown Reverberates Globally

For three decades the world witnessed China’s super-charged economic growth rate triple its GDP. Numerous industries and states worldwide benefited as a result, particularly as the health of the world economy was threatened by financial crisis beginning in 2008. Countries in both the East and the West were boosted by China, as prices of raw materials rose and prices of commodities fell.

However, as Chinese economic growth continued to accelerate, fear of a crash set in, causing the government to implement a number of policies aimed at cooling the booming housing market. Government controls, coupled with external pressures from the global financial crisis slowed growth more than intended, as illustrated by declining GDP growth over the past five years.

Not to say that this quarter’s 7.7 percent GDP growth is not formidable – indeed, for most countries it would be – however, gone are China’s ‘glory days’ when figures reached 10 percent. Even a small decline in China’s growth rate suggests an inherent problem and negatively affects the economies of a host of other countries, ranging from neighbours the Philippines, Korea and Malaysia to export partners such as the European Union, U.S. and Latin America.

China’s current growth model is becoming increasingly unsustainable. Mounting debt is required to maintain the same level of output, and there is an acute dependence on investment, which comprised a startling 50 percent of GDP in 2012. This high figure illustrates the economy’s over-reliance on government funded property and infrastructure projects. Additionally, state-owned banks have made oversized investments in the green energy market, particularly in solar power production. It is unlikely to incur the returns hoped for. Savings are also at an impressive 50 percent. Due to a failing pension system and inadequate healthcare in China, citizens feel obligated to save half their wages, with corporations following suit. This high rate of savings means there is room for increased consumption, a significant requirement for maintaining China’s current growth rate and switch to consumption-based, rather than export-led, growth.

Not only does the deceleration of GDP growth spell problems for Asia’s rising superpower, but the international implications are also numerous. At the regional level, China has become the key player in Asian manufacturing as instigator of a supply chain, in which several countries produce components for a product assembled in China for export. For countries such as Taiwan and Thailand, even a small reduction in the production of goods in China can cause a similar drop in their own levels of production and exports.

To put this in perspective, according to the IMF, a 1 percent fall in Chinese investment will cause a 0.9 percent reduction in Taiwanese growth. China was also responsible for the increase in the demand of raw materials such as oil, coal and iron, much to the relief of a number of economies struggling to keep their balance sheets in check. For example, oil exporters in the Middle East have come to rely on China’s vast production needs, but now they must adjust to less demand and lower prices. The U.S. supply of coal has also been affected, with the industry facing significant job losses due to less demand from China.

Yet another set of countries affected by China’s economic slowdown are those exporting investment goods to China, such as Germany and Japan. As China has such an investment-driven economy, the level of foreign investment is significant, and a fall in investment goods in China will have a significant impact on even large economies.

Finally, Chinese beneficiaries will also promptly feel its reduced growth rate as China has been investing heavily into African development projects since 2000. When considering the number of countries affected by Chinese GDP growth, it seems that China is becoming the world’s economic epicentre. Its reach stretches to every region of the world, and even countries not in a position to trade with the giant are still linked economically via generous investments.

China’s reduced economic clout makes it more vulnerable than previously to external shocks such as recession-stricken E.U. and U.S. trade partners. As China continues to slow down it is no longer as impervious to future global economic crises. Domestic policies are required to encourage spending and reduce investment so as not to transform the slowdown into a crisis. The pension system must be improved, and the dependence on the government propping up property and industrial markets must be overhauled. China’s economic boom was so powerful its ripples were felt throughout the world; as its economic bubble shrinks countries which have gained will also feel the contraction. China has a lot of work to do to re-vitalise its economic model, while trade partners must adjust to a Chinese economy not as infinite as previously admired or feared.

Categories: Asia Pacific, Economics

About Author

Elizabeth Matsangou

Elizabeth works as International Account Manager for an environmental technologies company and has previously worked for a political consultancy company in Westminster and for Intelligence Squared, a forum for live debates. She received a BA in Philosophy, Politics and Economics from the University of Essex and an MSc in International Relations from the London School of Economics.