Why is China’s economy slowing down?

China’s economic growth has made headlines for the last decade. It was the world’s success story – until Black Monday, when its markets crashed

February 12, 2016
Transcript

World Finance looks at the build up to Black Monday and how concerned world markets should be moving forwards.

China’s economic growth has been making headlines for the last decade. It was the world’s economic success story – until Black Monday, when its markets crashed. Today, China’s economic growth is half what it was.

Why?

The fact is, China’s slowdown was inevitable – for three reasons.

First, China’s economy has long been built on its manufacturing sector. Being the factory of the world is easy when you have a huge and growing population – harder when your one-child policy slows growth, ages your population, and creates a generation unwilling to accept the low-paid jobs of their ancestors.

China’s government is trying to move from a manufacturing and export-driven economy to a service and domestically-driven one. So exports are declining after decades of 20 percent annual growth – a huge part of China’s latest slump.

Second is China’s response to the 2008 financial crisis. The government spent $586bn to stimulate the economy. This worked in the short-term: bolstering industry and commerce. But it left a legacy of debt and dozens of ghost cities – bad assets doing nothing to sustain that first burst of growth.

In 2014 China aggressively cut the cost of borrowing. Again, this stimulated the economy briefly – especially at a local level. But householders are now servicing unsustainable debt instead of spending in the real economy.

China’s final stimulus came in August 2015, when China abandoned its currency peg with the dollar, and reduced the yuan’s exchange rate three times in just one week. This was done to make the country more competitive, but it also caused shockwaves in markets worldwide and prompted cries of manipulation.

The third reason is that – simply enough – China is transitioning from a developing to a developed economy. Growth rates of 10 percent a year just don’t happen in developed economies.

2016 does promise weaker Chinese growth. But the country’s economy is still growing at 4.3 percent. Most of the developed world would give anything for that growth rate.

Services are on the rise. Rail, technology, alterative energy, education, media and entertainment are leading the way.

So why is the world so worried?

Well, China is still the world’s second largest economy. Anything China does causes huge economic waves.

But as China shifts from an export-led economy to one more domestically driven, its impact on other countries should drop. China’s role as the vacuum of the world’s commodities will continue to recede. And as domestic consumption increases, China’s massive population will become an even more lucrative marketplace for sales and services.

China may no longer dazzle the world with its burgeoning economy, but slower, domestic-led growth will be a lot more sustainable.

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