The Chinese Economy was expected to rebound this year after three years of zero-COVID policy. But the latest economic data show that the world’s second largest economy has slipped into deflationary mode. Both retail sales and industrial production fell short of the predicted expectations. The most worrying aspect is shrinking domestic demand. The prices of apartments and a range of goods and services have fallen, with the dropping Consumer Price Index-based inflation.
Recently, China’s National Bureau of Statistics has reported that third-quarter Gross Domestic Product (GDP) growth has slowed to 4.9%.
There are concerns that a slowing Chinese economy could impact the incipient global recovery and regional economies like Pakistan as well. Let’s discuss the causes and effects of China’s economic slowdown and before that let’s understand its background.
Background: Unstable Growth and Strategic Choices
Premier Wen Jiabao’s Concerns (2007)
Premier Wen Jiabao raised alarms in 2007, highlighting instability, imbalances, a lack of coordination, and unsustainability as China’s economic challenges.
2008 Global Financial Crisis Strategy
China responded to the 2008 crisis by investing heavily in infrastructure (railways, highways, energy, and construction) to maintain double-digit growth and stabilize the economy.
Deferred Structural Issues
While this strategy spurred growth, it deferred addressing issues like low consumption, regional disparities, and inadequate social security. measures.
Leadership Imperative for Growth
The need to sustain prosperity for domestic, legitimacy drove China’s focus on high growth rates, even if it me-lint overlooking structural concerns.
What are the Causes behind this Slowdown?
These are some of the causes behind China’s economic slowdown:
Zero COVID Strategy
China’s policy of eliminating Covid-19 cases within its borders led to frequent lockdowns, travel restrictions, and mass testing. It created global supply-chain upheavals as well. These, along with geopolitical tensions, triggered manufacturing relocations, weakening domestic growth and consumer spending further.
- Decline in Industrial Output: The value-added industrial output expanded by 3.7%, slowing from the 4.4% growth in June.
- Falling Exports: China’s exports fell by 14.5% in July 2023 compared with a year earlier, while imports dropped 12.4%.
- Rising Unemployment: While overall unemployment rate had risen to 5.3% in July 2023, the Youth unemployment hit a record 21.3% in June.
Collapse of Housing Sector
The Chinese economy is currently facing a crisis of confidence. A confluence of factors has led to this. The major one is the near collapse of the decades-long debt-fuelled housing sector, which contributes to about 30% of China’s GDP.
China’s rapid economic growth was fueled, in part, by heavy borrowing. This has led to a significant buildup of debt in the economy, which could potentially hinder future growth if not managed carefully.
China’s debt is now estimated at 282% of GDP, which is more that of the US.
Clampdown on Tech Industry Sparked Economic Turmoil
The Chinese government began cracking down on its vibrant tech sector — video gaming, edtech, e-commerce — on the grounds that the tech companies were getting too big and powerful. This has resulted in huge losses of revenues and jobs, as many of these firms had to downsize or shut shop.
Decline in Investment and Consumer spending
Amidst the declining and uncertain economic environment, Chinese investors and households are cutting back on spending, leading to a deflationary situation.
According to the China’s National Bureau of Statistics (NBS), retail sales in July 2023 grew 2.5% year-on-year, compared to a 3.1% in June
China has been trying to shift its economy from a reliance on exports and investment to a more balanced model that emphasizes domestic consumption and innovation. This transition has been challenging and has resulted in lower growth rates, as well as increased debt and financial risks.
Trade War with the US
The trade tensions between China and the US have escalated since 2018, resulting in tariffs, sanctions, and decoupling measures that have hurt both sides. The trade war has reduced China’s exports, investment, and access to key technologies and markets.
It has also weakened the confidence of consumers and businesses, as well as the value of
the Chinese currency.
Why are Global Markets worried about the Slowdown?
- The IMF had previously forecast that China would account for 35% of global growth this year, but that’s looking far-fetched now
- The latest data suggests that China may struggle to achieve the growth target of around 5% set for the year
- A slowdown in China will affect global demand
- Not only is China the world’s largest manufacturing economy, but it is also the largest consumer of key commodities
- It accounts for almost half of the world’s metal consumption
Effects of China’s Economic Slowdown
Impact on Global Economy
China’s control of pandemic and restarting its industries has played an instrumental role in the post-pandemic global economic recovery.
The Chinese economy falling into systemic risks could lead to overall loss of momentum to the global post-pandemic economic recovery.
US-China trade war, has resulted in slowdown in Chinese exports resulting in losses for the countries (especially South Asian Countries) that depend on China for ‘Supply Value Chain’ for producing components and other finished goods
Global Trade Impact
China’s economic slowdown has implications for global trade. As one of the world’s largest economies and trading partners, China’s reduced economic activity affects international trade flows, impacting both suppliers and consumers worldwide.
The slowdown has led creased demand for commodities such as crude oil, cement and steel. China’s status as a major consumer in these markets has caused a cooling of prices impacting countries that rely on exporting these commodities
Supply Chain Disruptions
China plays a critical role in global supply chains. Its economic slowdown and disruption in production have affected supply chain dynamics, causing delays worldwide.
Global Economic Growth
China’s slowdown contributes to lower global economic growth rates. The country’s reduced demand for goods and services affects other economies, particularly those that heavily depend on exports to China.
Regional Trade Partners
Neighboring countries that have strong economic ties with China, such as those in Asia, are
directly impacted by China’s slowdown. Reduced demand for their exports to China affects their economies as well.
Currency Exchange Rates
China’s economic slowdown can impact currency exchange rates. Fluctuations in China’s
economic performance can influence the value of its currency, affecting exchange rates globally.
China’s Economy: Future Outlook
State-Owned Enterprises (SoEs) Challenges
State-owned enterprises, due to preferential treatment and political networks, pose ongoing
challenges. Their resistance to change and reliance on political influence can hinder necessary
reforms for economic growth.
Ever Grande Crisis and Systemic Issues
The Ever Grande crisis exposed vulnerabilities within China’s housing sector and revealed
potential systemic issues. Addressing these challenges is crucial to preventing further disruptions in the economy.
Middle-Income Trap and Value Chain Advancement
The looming middle-income trap poses a dilemma for China’s economic trajectory. To avoid
stagnation, China must navigate this challenge and advance its position in the global value chain,
which requires innovation and upgrading industries.
China’s economic challenges underscore the need for strategic decisions in a shifting landscape. Achieving growth while addressing internal imbalances and global uncertainties remains a formidable task. As China’s economy evolves, its choices will resonate on the international stage, reshaping the perception of its rise and risk appetite.