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Where is the Chinese Economy Headed?

January 20, 2016

Chinese Economy – Trouble Brewing

The early part of this decade seemed to usher in mixed signals for many major economies of the world. While Greece spelt a volatile Euro and a tumultuous European Union, the BRICS seemed all set to dominate. Brazil, Russia, India, China, and South Africa formed the BRICS bank to present a united economic organization and back home each was growing at an unprecedented rate. The star of the club was China, the second largest economy of the world – with a double digit growth rate that even touched 12 percent in one quarter, things couldn’t have been better. And just about then, started the great economic downslide of China. Through 2015, economists have been predicting a major slowdown of the Chinese economy and its implications on global markets. It now looks like the economic storms that were brewing are all set to ravage China.

Slowest Growth in 25 Years

All through 2015, the Chinese economy recorded a deceleration that caused alarm bells to ring in Asia and in many major economies. On January 19, 2016, however, Chinese officials released data that confirms our worst fears. Economic growth for the whole of 2015 has been pegged at 6.9 percent (against a government target of 7 percent growth for the year) – the lowest in the country for the past 25 years. The last time the Chinese economy saw these low growth rates was in 1990 when the backlash over the crackdown in Tiananmen Square resulted in the loss of most foreign investments. The growth rate for the October – December quarter was estimated to be about 6.8 percent – the lowest in a long time now and certainly well under market expectations.

Failing Industry and Exports

The key strength of China’s economy has been its manufacturing industry, driven by exports to the US and Europe, apart from the rest of Asia. One of the major reasons for the slowdown in the country’s economy is its drastic fall in exports. Export of manufactured goods accounted for 34.9 percent of China’s economy in 2007 but by 2014, it made up for only 22.6 percent of the economy. For the past 15 months now China’s exports have shown a decline. In July 2015, data revealed a decline in the exports by about 8.3 percent (in dollar terms). August and September saw an exports decline of about 5.5 percent and 3.7 percent in September. China is also the world’s largest trading nation. With the slump in exports and manufacturing, the country’s imports also recorded a sharp fall (13.8 percent and 20.4 percent decline in Aug and Sep 2015). African imports to China have fallen by about 40 percent. Through the early three quarters of 2015, industrial growth in China clocked a mere 6 percent growth. Most traditional industries and exports are facing the brunt of this decline. As the Chinese government is scrambling to stabilize short-term growth, emphasis naturally shifts to the high-tech, high-end exports. This in turn seems to be catastrophic for many traditional goods manufacturing factories and units. While China may derive some comfort from the fact that services in the country grew by about 8.4 percent in Q I to Q III of 2015, this shift seems more towards growth in credit than a growth in the services sector itself.

Stock Market Crash and Global Impact

The stock market crash of June 2015 in China resounded across the globe. Most of the A shares listed on the Shanghai Stock Exchange lost about 30 percent of their value within a month. The crisis deepened in August when the crash of August 24, called Black Monday, resulted in Shanghai’s main share index losing some 8.49 percent on a single day. China’s impact on global economy became clear with major exchanges and indices including the NYSE, Germany’s DAX, London Stock Exchange, Tokyo Stock Exchange, and the Bombay Stock Exchange falling by up to 20 percent. China’s is still struggling to recover from this stock market debacle and worries are that a multi-year slowdown and recession in the country may lead to a global economic depression.

Broader Outlook

A general slowdown in the economy is anticipated when developing countries catch up with other major nations such as the US and in Western Europe. Taiwan, Japan, and South Korea experienced such slumps. The real cause of concern is the fact that China is still poor with a low cost of living. The Gross Domestic Product (GDP) of China (per capita) is pegged at about USD 8280. Add to this the fact that its massive population is quickly aging and between now and 2030, the country’s working population is likely to decline by about 53 million people. Revoking its one-child policy is not likely to bring in any significant changes very soon. China will still be required to look at a sharp spike in elder care, healthcare, education, and infrastructure costs despite a decline in economic growth rates. Uncertainty in oil prices is not helping China’s cause. “Falling oil prices have been floating the Chinese economy … it’s scary what might happen in China if oil prices rebound”, tweeted Salvatore Babones, an expert in global affairs. With increasing expenses and dwindling economic growth China may well be staring at a troubling fiscal deficit. A solution to China’s plight may lie in addressing all these issues even while oil prices continue to support industry.

A Rounded View

Is the Chinese economy doomed to fall apart? Will this fall drag the major economies of the world down? While these worries persist, there is some reason to hope for an improvement in this scenario. Some economists believe that while the Chinese economy is definitely looking at a mufti-year slowdown, it is not isolated in this deceleration. The International Monetary Fund (IMF) estimated the global economy growth at a mere 3.1 percent through 2015. This is lower than the July forecast of 3.5 percent growth that IMF predicted for the world economy. While China’s exports dip has had the world alarmed, the decline is lower than the export slump in South Korea and Taiwan – a clear indicator that the Chinese economy is holding fort despite a decline in the world economy. China’s the General Administration of Customs believes that the measures taken by the organization will reduce the decline in both imports and exports in the final quarter of this fiscal year. The organization has introduced a slew of reforms including reduced taxes that are likely to improve the scenario.

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