News ID: 256111
Published: 1218 GMT July 21, 2019

As China’s economy slows, why the world should care

As China’s economy slows, why the world should care
NICOLAS ASFOURI/AFP

China’s economic growth is sputtering. The official forecast of six percent to 6.5 percent is the slowest on record, and the 6.2 percent growth actually reported in the second quarter is the weakest since the government began releasing quarterly data in 1992.

The most obvious and recent cause is the trade war with the US but the impact is global, with knock-on effects on companies and countries all over the world, Bloomberg wrote.

 

What explains all the worry?

 

China’s $14 trillion economy, second in size only to the US, accounts for almost a third of global growth each year. That makes it a vital driver of job creation and improved living standards everywhere. The advanced age of the US expansion — more than a decade — and worries about growth in Europe make China’s pace of continued growth that much more important. If China’s current slowdown were to suddenly accelerate, the ripple effects could squelch the global recovery. A slowdown is structural — something that’s expected to happen over time. But a plunge defies expectations and is therefore far more disruptive.

 

What’s wrong with six percent?

 

In one respect, nothing, since it’s more than twice the global rate. But China’s economy is loaded up on debt and its ability to service repayments depends on rapid growth to generate the profits and tax revenues needed.

Slower growth challenges China’s ability to stem the buildup of its government, corporate and household debt — which according to Bloomberg Economics is on track to add up to more than 300 percent of gross domestic product by 2022. The bigger that debt pile becomes, the bigger the impact on global growth should it all go sour.

Plus, growth is set to slow further and could even slip below six percent without more aggressive stimulus — something Beijing has been leery of trying for fear of sparking a financial blow-up.

 

How’s the slowdown being felt?

 

It has impacted everything from factory output to the jobs market. Deflation is looming after China’s producer price index slowed to zero in June from a year earlier, the weakest reading in almost three years. Slower consumer spending has hit multinational companies including Apple Inc. and Prada SpA. Starbucks Corp., which was opening a new store in China every few hours, saw its same-store sales growth begin to slow in 2018. The trade war is hurting exports as US tariffs bite and is causing imports not only from the US to plunge, but also those from Japan and South Korea — illustrating how the battle is reshaping global commerce.

 

How bad could it get?

 

With no resolution in sight for the US-China trade war, things will probably get worse before they get better. Business confidence and activity is looking shakier across the globe. Second-quarter GDP in export-reliant Singapore, a bellwether for global demand, shrank the most since 2012. Across Asia and Europe, factory activity shrank in June, while the US showed only meager growth, according to purchasing managers’ indexes.

Meanwhile, rising tariffs have led companies to move some production out of China to countries such as Vietnam. As of mid-July, all 10 of the gauges tracked by Bloomberg to assess the health of global trade were below their average midpoint, including four below their long-run normal ranges, and the balance threatening to join them.

 

Why is China growth slowing?

 

Aside from the trade war, simply because such a breakneck pace of growth can’t continue forever. As the population ages, there are fewer working-age adults to drive output. There are fewer easy investment opportunities, like building missing infrastructure. And the debt overhang means more activity has to go to paying back the spending of the past. Other drags are President Xi Jinping’s ‘critical battles’ to reduce China’s massive debt pile and clean up toxic air pollution. Retail sales, long a pillar of the economy, aren’t growing at the pace seen in years past either. The auto industry last year posted its first drop in annual sales in nearly three decades.

 

What’s China doing?

 

Trying to walk a fine line. The fire-hose stimulus that followed the global financial crisis kept China from a Great Recession like the US suffered but swelled the debt mountain. Now it’s trying to do just enough to prevent a hard landing — where the economy flat-lines or flirts with recession — while avoiding another debt buildup.

A fiscal stimulus plan including about ¥2 trillion ($291 billion) of tax cuts is slowly feeding through into the economy. The government has eased the rules for using government debt in some infrastructure projects and pledged to renovate hundreds of thousands of old buildings.

The People Bank of China has also requested banks to not lower mortgage rates further, despite easier monetary conditions. It’s also boosted credit support for small firms, increased liquidity for smaller banks and asked big lenders to sustain funding to avert a squeeze. In June, the top economic planner unveiled a stimulus plan to help spur demand for automobiles and electronics.

 

 

 

 

   
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Resource: Bloomberg
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