China’s economy slows down: Here’s how it is affecting the world

By: |
Published: March 5, 2019 4:17:40 PM

China’s $13 trillion economy, second in size only to the U.S., accounts for almost a third of global growth each year.

China economy GDPIf China’s current slowdown were to accelerate, the ripple effects could squelch the global recovery. (Bloomberg)

China is facing its most difficult economic environment in years. Policymakers in March lowered the official economic growth target for 2019 to a range of 6 percent to 6.5 percent. The economy expanded 6.6 percent in 2018, already the slowest in almost three decades. When China sneezes these days, many companies far from its shores risk catching a cold, including makers of airliners and handbags, growers of soybeans and operators of tourist attractions.

1. What explains all the worry?

China’s $13 trillion economy, second in size only to the U.S., accounts for almost a third of global growth each year, which makes it a vital driver of job creation and improved living standards. The advanced age of the U.S. expansion — more than nine years — and worries about growth in Europe make China’s pace of continued growth that much more important. If China’s current slowdown were to 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.

2. What’s wrong with 6 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 calculations is on track to add up to more than 300 percent of GDP by 2022. The bigger that debt pile becomes, the bigger the impact on global growth should it all go sour.

3. How’s the slowdown being felt?

Apple Inc. cut its revenue outlook for the first time in almost two decades, citing weaker demand in China, and global equity markets swooned. Starbucks Corp., which has been opening a new store in China every few hours, saw its same-store sales growth begin to slow in 2018. Jaguar Land Rover shut a U.K. plant for two weeks in October, blaming sinking demand in China. And the list goes on. Chinese consumers accounted for roughly a third of the $121 billion spent on luxury goods worldwide in 2017. Many of those purchases are made outside China, making companies like Louis Vuitton, Gucci and Hermès heavily dependent on globe-trotting mainlanders. The whole travel and tourism sector is especially nervous. About one of every four jets that Boeing Co. builds is bound for China. The country also accounts for more than a fifth of the money spent annually by tourists traveling outside their homeland, almost twice as much as the next-biggest spender, the U.S.

5. How bad could it get?

A severe slowdown in China could shave 1.5 percentage points off U.S. GDP growth over two years, according to a report by Bloomberg Economics. (Severe was defined as a sharp drop in growth similar to China’s experience in the global financial crisis.) Among commodity exporters, Russia would be hurt the most. Trade-dependent Singapore and Hong Kong would also suffer badly. Taiwan, Thailand and other countries that feed components to China’s massive manufacturing machine are also threatened. An analysis by Deutsche Bank AG estimates that while China notionally exports about $45 billion worth of mobile phones to the U.S., for example, more than 80 percent of the value comes from parts imported from other Asian countries as well as American-owned intellectual property.

6. Why is China growth slowing?

Simply put, because such a breakneck pace of growth can’t continue forever. As the country 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. Compounding the situation is the trade standoff with the U.S. as well as 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 in 2018 posted its first drop in annual sales in nearly three decades.

7. 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 U.S. 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 cut of 3 percentage points to the top bracket of value-added tax was announced at the National People’s Congress in March to help the manufacturing sector. China’s rolling out measures to stimulate sales of cars and household appliances and is looking at widening this year’s fiscal deficit. It softened its long campaign to clean up the banking system, cut taxes, added infrastructure projects, eased monetary policy a tad and increased bond financing.

After cutting the amount some banks have to hold as reserves four times in 2018, in January it announced the first cut for all banks since March 2016, a move to encourage banks to lend. There’s also been an unprecedented push by senior officials to cajole lenders into making more loans to private companies, which employ the most workers.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Next Stories
1Slowing dragon: China lowers GDP growth target, cuts taxes
2Trade war: President Trump threatens to end trade benefits for India, Turkey
3US, China close to trade deal; Beijing to ensure better IPR protection, buy more from US