China’s Slowdown And Global Financial Market Volatility: Is World Growth Losing Out?

Economic slow-down in China

China is one of the world’s fastest growing economy. As recorded by International Monetary Fund, economy has maintained an average growth rate of 10 percent in the past thirty years. In terms of nominal Gross Domestic Product (GDP), China was the second largest economy in the world. When considered in terms of purchasing power parity (PPP), China holds the second position, only next to United States (Horton and Gauvreau 2015). The economic growth of China is mainly contributed by the manufacturing sector that produces a large volume output and export all over the world. However, since the decline in global oil price in 2014, there is growing concern that the economy is entering into a phase of economic slow-down. The essay analyzes the consequences of China’s slow growth on global economy.

Many economists have suggested that economic slowdown in China begins following population aging and increase in wages to meet international standard. During the phase of economic expansion, the economy benefitted from rapid growth of working age population. The relatively lower wage along with growth of working age population fueled the growth of manufacturing sector (Cashin, Mohaddes and Raissi 2017). The problem was that such changes in the economy came at the expense of growth in service sector. The labor requirement in the manufacturing sector however lessens overtime as new technology replaces manual labor.

China accounted only 7 percent growth in the fourth quarter of 2014 as against an average growth of 10 percent in the past thirty years. The manufacturing activity in China fell to the lowest level since the past six and half years (Glaser and Funaiole 2015). The main diver of declining growth in China is shift of the economy from investment driven growth to that of consumption driven one.

Figure 1: Growth in real gross domestic product of China

(Source: Statista.com, 2018)

Shift of the China’s economic activity and the resulted slow growth means a disaster in global commodity market. China is the biggest importer of crude oil in the world. In consumes one of every 13 barrels worldwide. China also is one significant importer of copper, aluminum, steel and nickel (Lai 2015). The decline in China’s import demand of coal to a significant extent causes a fall in global commodity prices. The Bloomberg commodity price index declined 25 percent in 2015.

The economic slow-down in China not only hampers economic prosperity of China but also affect other economies across the globe. The sudden decline in commodity prices add to volatility in global commodity market and hampers revenue of commodity export and energy exporting nations. One such example is the fluctuation in Brent Crude which price increased to $54 from $43 in just one week before declining significantly in the next week. The volatility in global market hurts the confidence of investors and firms (Breslin 2016). The volatility in stock market and fluctuation in revenues causes many investors to panic and pull out their money from various position.

Consequences of China’s slow economic growth

The steep fall in commodity prices was large sourced from falling demand in China. There are different supply side factors that are in effect hampering global economy. After the news of Iran deal and decline in oil production capacity in Iran oil price declined to almost $10 (Otsuka, Higuchi and Sonobe 2017). The largest effect on global market however drastic fall in China’s demand.

China’s slow-down not only harms specific firms but also the whole countries particularly in emerging nations that were experiencing a positive growth in the last few years due to export of commodity and trade relation with China. In Saudi Arabia for example, 90 percent of the export is oil, for Nigeria, oil records 85 percent of government revenue. The decline in oil export causes government revenue to decline by 40 percent (Loke 2018). The spillover effect of China’s slow-down not only limited to emerging economies but it also damages several advanced nations. Developed countries like Australia, South Korea, Canada and Noreway have been severely affected from a decline in commodity price and slow growth in China. Export in South Korea lowered by 8.3 percent in September quarter compared to that in the previous year.

Besides the current shift of economic growth from investment to consumption China’s government takes the strategy of currency devaluation following which renminbi depreciated by 2 percent. The US dollar on the appreciated anticipating a hike in the interest rate. Depreciation of renminbi increases competitiveness of China’s export. Other goods in the international platform being valued at US dollar experienced a decline in prices. Because of lower commodity price, importing countries like United States experienced a current account deficit of 16 percent.

Currently, no other countries in the world are able to generate same level of growth and import demand as that of China. This caused many of the commodity production to operate below the potential level. There is expectation that Africa and specifically South Africa, Nigeria and Kenya will continue to grow at a fast pace to overcome shortage of demand following China’s slow growth. The African countries however will face considerable difficulty in achieving targeted growth rate if China lower the volume of trade and investment to these countries.

The impact on China on emerging countries and commodity market now has introduced another possible threat for firms and different economies called the credit crisis. The combined Asian debt increased to 200 percent of GDP in 2015 compared to 150 percent in 2007 (Fabre 2016). A report published by IMF pointed that the proportion of corporate debt to GDP increased by 26 percentage.

Conclusion

It is however unlikely that China’s growth will recover in the longer term. The current fertility rate of China is 1.6 percent as against the required fertility rate of 2.1 percent in order to sustain present population size. There is also a growing proportion of dependent population in China following the growing number of elder population. China will estimated to have 223 million people aged 65 by 2030 (Krolikowski 2017). The rapid growth of China created considerable environment damage, economic instability and corruption. The lack of environmental care and corruption will further hamper long-term growth of the economy.

It is often argued that, instead of slowing growth in China it can be considered as the maturity phase of the economy. This is due to the fact that, though GDP growth in China is declining but the figure is expressed relative to the GDP of the base year. In 2009, China’ GDP recorded to be $5.0 trillion which increased to $10 trillion in 2014 (Hong et al. 2017). This is because shift of economic resources from manufacturing to tertiary sector increases median income. This in turn indicates China is not slowing down rather it is maturing from its earlier investment and manufacturing phase.

Conclusion

The paper briefly summarizes consequences of China’s slow-down in China’s economic growth on global economy. The discussion suggests that in the short run thee is severe negative on emerging economies. The global commodity market suffers from a drastic decline in commodity price. There is an overall decline in global interest rate. In the long-run however there is a hope that China will overcome by its large consumer base demanding products from global market. In the meantime, African countries will also grow and import commodities by itself. The resource rich countries should try to diversify their sources of revenue. In this process, they should focus on shifting away export orientation. Investors should also be aware about the potential credit crisis from China’s economic slow-down.

References

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Otsuka, K., Higuchi, Y. and Sonobe, T., 2017. Middle-income traps in East Asia: An inquiry into causes for slowdown in income growth. China Economic Review, 46, pp.S3-S16.

Statista.com, 2018. China GDP growth rate 2010-2022 | Statistic. [online] Statista. Available at: https://www.statista.com/statistics/263616/gross-domestic-product-gdp-growth-rate-in-china/ [Accessed 27 Oct. 2018].