Implications of China’s growth slowdown

It could have repercussions that extend well beyond the economy

The once extraordinary rate of Chinese economic growth is slowing. In 2014, China’s GDP grew at an official rate of 7.4 percent, slightly less than the stated goal of 7.5 percent. Although more recently monthly data have been more robust, the trend towards slowing growth seems inexorable.

A decelerating Chinese economy, coming at a time of global economic uncertainty (especially in the eurozone), could have dramatic economic implications throughout the world. However, the repercussions of a Chinese economic slowdown would not be limited to the economic sphere. Given the incredible importance of economic growth to political stability – both within China itself and East Asia in general – adapting to a dampened Chinese economy will be a pivotal challenge in the Asia-Pacific.

While an official GDP growth rate of 7.4 percent would be the envy of most major economies, this figure represents China’s lowest economic growth since 1991. And of course, economic data from China’s National Bureau of Statistics is not completely trusted by all observers. Local officials (and the central government itself) have a vested interest in exaggerating their economic performance.

Capital Economics, a London-based research group, monitors the Chinese economy by looking at the five factors of electricity output, freight shipmen, construction, passenger travel, and cargo volume. According to this China Activity Proxy, recent annual growth is closer to 5.7 per cent.

China’s once-booming housing market is now deflating, with prices falling in a majority of cities. Prices appear to be dropping because the rapid increase in housing supply in recent years has outstripped demand. China’s historically strong international trade is also taking a hit, with exports down 3.3 percent from a year ago and imports dropping nearly 20 per cent.

In June 2014, Chinese Premier Li Keqiang pledged to maintain a robust growth rate: “China’s economy needs to grow at a proper rate, expected to be around 7.5 per cent this year…We are well prepared to defuse various risks.” Indeed, since this pledge and the subsequent slowdown, the central government has used macroeconomic tools to boost growth. The People’s Bank of China cut interest rates in November, and more recently lowered the reserve requirement ratio, freeing up $100 billion for lending. China has weathered previous economic predicaments, for example the 2008 global financial crisis, and emerged stronger. A hard landing is by no means a foregone conclusion, and China still has many macroeconomic advantages.

China does more international trade than any other country on earth. Besides issues of trade, any problems in the Chinese financial system could have serious global impacts, especially coming at a time of relative global economic uncertainty.

If China does face a prolonged period of economic difficulty, the political repercussions could be volatile. The Chinese state might be forced to look for alternative sources of popular support. China’s leaders could implement additional populist measures. It is also possible that increased nationalism could come in to play, especially in the unresolved territorial disputes in the East China Sea and the South China Sea. Regional and global powers would be wise to monitor China’s economic situation closely.

By: Brendan P O'Reilly