Primary Causes of Economic Slowdown in China
Despite China’s prolonged reliance on the cheapness of export, it has slowed drastically. Probably, the complex situation in the major importers’ economy is the major cause of it. Overall, the decline in the Chinese export was not only predictable but also logical since Europe and the U.S. do not accommodate enough resources. On the other hand, within China, the demand to imported goods rose no higher than 0.3% in 2012, which has practically beaten the record of the 2009 crisis (Schramm 89-90). It appears that a wide array of products does not produce significant interest for Chinese enterprises. The strategy, however, seems inefficient to the government, threatening to result in a price increase as a direct consequence of the money flow increase. Inflation produces a tangible threat of social anxiety, which is excluded from the government’s scope of work. In addition, a property bubble cratered the Chinese housing market; the malfunctioning loan systems are concealed by the government but some experts state it is only a question of time before a Chinese Wall Street 2008 occurs. By stating this, they also point out the corruption of the Chinese government. The government officials are constantly urged to conduct some currency reforms and help private enterprises – but fail to do so since it would cause a system reshuffle and a potential loss of revenue (Morrison and Labonte 3-16).
Secondary Causes of Economic Slowdown in China
The year 2011 marked an investment increase up to an astounding 50% of GDP, a level that no other economy was able to ever reach and sustain (Morrison and Labonte 3-16). The underside of it was that China was more involved in infrastructure than all its major trading partners taken together. Also, the rates of unemployment are still alarming: an estimated 15 million of Chinese people was experiencing unemployment in rural districts alone, as reported in 2011 (Morrison and Labonte 3-16). Still more alarming is that, possibly due to the one-child policy officially established in the 80s and relaxed by now, the Chinese population is aging. Some analysts even surmise that as the main cause of the slowdown, although these assumptions are questionable. What leaves no further questions, though, is the invisible debt that Chinese households and establishments suffer: by 2015, it amounted to 130% of GDP, and has nearly doubled since then if one accounts for the banks as well. The said factors, in turn, trigger the inflation of wages that runs 15% annually (Morrison and Labonte 3-16).
Shadow Banking
One of the sources of potential risk jeopardizing Chinese financial sector is shadow banking. The reason the danger seems tangible is the outstanding loans summing up to 10-15% of the accounting statements of the official sector. In their turn, the underperforming loans sum up to almost a third of all loans landed by Chinese major banking institutions, equaling in more than two hundred billion USD (“Chinese banks’ new bad loans” par. 1-2). The reason might be that state banks allow the loans to stay unpaid for two years until they are considered underperforming, while, according to international standards, the period of no response from the payer should be no more than 3 months. The shadow banking has led almost half of the loans to the point of no repay (“UK Exports to China” par. 35-68).
Domestic Demand Downfall
A healthy GDP in 2012 was estimated at 7.5% – in contrast to a 9.2% the previous year (Morrison and Labonte 15-38).. The possible cause to the downfall might be the decrease in domestic demands. The inflation was drastic, and it created a wealth gap, which, in turn, triggered the numbness of the Chinese consumers. Wages are slow to increase, which is why the patterns of consumption are tattered across the state. The rates of consumption contributing to the GDP in 2013 were 15% lower than those of 2012 fiscal year. Consequently, the country went back to the point of investment-reliance (Morrison and Labonte 15-38).
Global Implications of Chinese Economy Slowdown
The slowdown of Chinese economy is not only drastic for China but for those parties engaged into trade with China – i.e., Europe and Asia. For instance, German investors have every reason to feel unnerved since the Chinese export demand is falling rapidly (Carrel par. 5-7). Also, the Asian Development Bank expressed its growing concern over China’s slowdown by cutting the estimated development percentage by 0.3 since the year 2013 (Nolan 13-16). In perspective, China’s decelerating growth will probably affect the countries trading with China. There is a decrease in demand for Chinese products in such countries as Brazil and Australia to be expected. The suppliers are probably also going to be affected once China is drifting towards less investment-driven and more consumer-supported economy. In addition, the house bubble that China experiences will shock the global economy as well. Investing into Chinese realty will no longer be profitable, which means that the investors are going to be uninterested, if not scared away. China being the world’s second largest economy, if the consequences of its slowdown will lead to crisis, the global economy will be affected as well. Asian consumers are beneficiaries to the most common products such as fuel, crude metals and manufactured vehicles – making them an element of utmost necessity for the sake of global economic good.
Challenges Awaiting Chinese Economy
The government apparatus in China, albeit ideology-based, is comparatively decentralized and passive in terms of economic regulations. A stunning percentage of businesses is owned by the state, making them economically inefficient and causing numerous complaints from the side of foreign partners and political figures. There is still more to that: the human assets that China accommodates are small in number quantity. The aging population taken into account, such sparsity of skilled work resources can result into a structural unemployment. Indeed, the employed population ratio is estimated to decrease by the year 2030 by almost 10% (“Trade to remain subdued” par. 12-25). As to the aging population, the measures taken by the government to reduce the population density have done their part. There is a significant decline in population to be expected after a peak period between 2030 and 2040. If the level of human resource education remains stable – that is, insufficient – the unemployment will have catastrophic proportions. The pollution level of China is also a cause of worries: it is estimated that unhealthy emissions produced by China will overcome those of the US and the EU by the year 2035 (“Trade to remain subdued” par. 12-25).
Summary and Recommendations
Since the beginning of its economic reforms, China has demonstrated an unbelievable growth rate. However, such expansion has proved quite complicated in maintenance, provoking a reasonable question whether the gloss and glory of the Chinese economy are fading. As I see it, while the country can stay sustained for another couple of decades, the future is going to be strenuous due to the decrease in output and consumption directly resulting from the issues mentioned above. Some preventive measures can be taken nonetheless to prevent the potential collapse. First and foremost, the private businesses should be reformed in terms of openness and accessibility. It will eventually relieve the tension on the private sector and opt for market-orientedness. Secondly, encouraging private establishments and small-scale businesses would sufficiently expand the market and provide it with room to maneuver. Furthermore, there is a necessity to improve the level of education to compensate for the lack of human resource that is predicted in China in the second half of the 21st century. The investment and the adjustment of education to the students’ demands is needed to enhance the quality of the potential workforce. The unemployment will be reduced, and the life quality both in urban and rural areas will be improved. As to the governmental measures, amid a growing ideological crackdown, China needs an intergovernmental system. It would enhance the elasticity of income and maintain it. Also, such government would incentify the evolvement of public infrastructure and manage the governing center on the level of macroeconomics. In addition, the resources would be distributed evenly, according to what is currently the top priority of the nation.
Works Cited
Carrel, Paul. “Once a source of envy, Germany’s China exports turn into a risk.”Reuters, 2015. Web.
“Chinese banks’ new bad loans more than doubled in 2015.”Reuters. Thomson Reuters, 2016. Web.
Morrison, Wayne, and Marc Labonte. China’s Currency Policy: An Analysis of the Economic Issues.Congressional Research Service. CRS Report for Congress, 2013. Web.
Nolan, Peter. China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution. Basingstoke, UK: Palgrave Macmillan, 2015. Print.
Schramm, Ronald. The Chinese Macroeconomy and Financial System: A U.S. Perspective. New York, NY: Routledge, 2015. Print.
“Trade to remain subdued in 2013 after sluggish growth in 2012 as European economies continue to struggle.”World Trade Organization. WTO, 2013. Web.
“UK Exports to China: Now and in the Future.” Foreign and Commonwealth Office. FCO Economist Unit, 2013. Web.