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China’s Economic Slowdown

Feb 26, 2019

Tensions between the United States and China have made headlines in recent weeks, adding to worries about cracks in what seemed like the untouchable Chinese economy. According to the BBC, China’s stock market ended 2018 with a loss of 28%, the worst in the world. Apple, a company whose growth and success has become a sure-thing in the minds of investors and consumers alike, announced in the first week of January that it would not meet its predicted sales numbers, along with companies like General Motors, Ford, Jaguar, and Baidu.

According to Forbes, China’s economic downturn is a “deep and complicated transition” bound to carry effects across the globe. China’s productivity has been booming for years: its labor force is larger and more skilled than ever before, there is an acceleration in available technologies, and there is greater efficiency in the allocation of resources and investments. Economic reform in the late 1970s drastically changed life for the average Chinese citizen. Slowly, the largely agricultural workforce began to move to cities, and whilst initially only 2% of young adults had post-secondary education, by 2016 this number grew to over 30%.

As the market moved from a government-driven fund allocation model to a more price-based model, the private sector flourished – and now accounts for two thirds of all investment. With this increased investment came the opportunity to embrace new technologies. Opening up channels to foreign transactions allowed foreign direct investment to bolster economic reform and innovation. And all of this relatively new activity in the country’s economy led to increased exports. IMF data shows an average of 17% growth in exports every year for three decades, making China the world’s largest exporter. In fact, according to the BBC, China accounts for 19% of current global economic activity.

The growth spurt in urbanization and education, while driving the economy for a number of years, has been slowing since 2012. It is unlikely that the dramatic export growth can continue for much longer, as it cannot surpass the growth of the global economy. In fact, China’s economic growth has been slowing in recent years and is now running at 6.5% annually, a number that is expected to decrease as the trade war with the United States intensifies. Production and new orders in the factory sector has fallen due to the trade war and weak commodity prices, and factory profits fell for the first time in three years. Factory workers are beginning to have difficulty finding jobs and blame the US tariffs as well as China’s overall economic slowdown for their challenges.

On the flip side, China’s Vice President, Wang Qishan, dismissed fears of the slowdown, saying that although it was true there were risks such as protectionism and populism facing the Chinese economy, the growth rate, which stood at 6.6% in 2018, was still “a pretty significant number” and that moving forward, the emphasis would be on the “quality and efficiency” of China’s growth. Speaking at the World Economic Forum, Wang Qishan stressed that “one certainty is that China’s growth will continue and be sustainable.” Perhaps in line with this promise, China’s central bank injected $84 billion into the country’s banking system “to boost liquidity and promote increased lending to a slowing economy.” Previously suspended infrastructure projects have been allocated at least $125 billion, including a subway and other railway investments. New quotas for bond sales were introduced and new tax cuts were designed to fund infrastructure projects and support small businesses, manufacturers, and exporters respectively.

At the same time, the trade war between the US and China has given way to negotiations aimed to solve the dispute. Richard Neal, chairman of the House Ways and Means committee, said that US-China policy had to be in America’s best interests “today and for the future,” commenting that there was an “obligation to look beyond the political pressures of the moment.” Presidents Trump and Xi have set March 2nd as the deadline to strike a comprehensive agreement, although there is talk of extending this deadline.

What all this drives us to understand is that while the Chinese economy is facing a slowdown and its growth spurt reaches a saturation point, it may be a mistake to fixate on GDP growth rates to signal a greater problem. Looking at the big picture, it is important to note that in 2010, 10% real GDP growth added $606 billion to the economy. In 2017, however, 6% growth added $1,202 billion, double the amount of the 10% growth in 2010. As George Magnus, research associate at Oxford University’s China Centre says, “I don't think anyone is thinking at the moment that China's economy is about to fall off a precipice, it's just that everything has come off considerably from elevated levels it has been at for the last decade or more.”

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