China's Economic Slowdown: A Paradigm Shift with Global Repercussions

China's economic trajectory has been one of the most interesting economic case studies. For decades, it served as the engine of global growth, but recent data paints a concerning picture. This article talks about the what, why and how of China's slowdown and its impact on global economy.

Historical Growth

China's economic rise has been phenomenal. Its contribution to the world GDP rose exponentially from a mere 2.3% in 2000 to about 19% in 2023[1]. GDP (current prices) grew from just above USD 1,200 billion in 2000 to near USD 18,000 billion[2]. China has been the world’s second-largest economy since 2010 when it overtook Japan.

This phenomenal expansion was fueled by a combination of factors, including:

• Export-oriented manufacturing:?China became the "world's factory," attracting foreign investment and generating significant export surpluses. China has been the largest exporter in the world post 2013. To understand the changes that happened in the manufacturing sector in China, let’s look at the below timelines:

• Real estate boom:?The real estate sector witnessed explosive growth, contributing heavily to GDP. This growth was attributable to rapid urbanization, govt policies encouraging home ownership, rising income levels, etc. More on this later.
• Massive government investment:?The Chinese government played a central role in driving infrastructure projects and stimulating economic activity. This infrastructure build-out had a multiplier effect. It improved connectivity across the country, which in turn, spurred further economic activity in manufacturing and trade sectors. Also, it created jobs in construction and related industries, boosting domestic consumption.

Below chart shows the contribution of various sectors to GDP in China. As seen, share of manufacturing and agriculture is consistently being eaten up by services sector.

2023 performance

China’s GDP grew at a rate of 5.2 percent year-on-year in 2023, based on lower base of 2022 when the growth rate dipped to 3%[3]. The forecast by IMF indicates further decline in growth rate till 2028 (please refer chart below).

The services sector grew by 5.8% followed by Manufacturing sector at 4.6% in 2023 China. The per capital income saw healthy growth to USD 5,451, growth of 6.1%. Population shrunk by ~2 million to 1.41 billion; unemployment rate was 5.2% in 2023.

?Issues Resulting in China's Economic Slowdown:

?Looking the super growth China was enjoying, other developing countries started developing manufacturing capabilities- India, Vietnam, Indonesia, Bangladesh, Mexico, Brazil, etc. Each nation found their key products depending on availability of natural resources, know-how and skilled manpower. Post 2010, the share of exports of fellow nations started rising rapidly.

Further, several structural issues are contributing to China’s slowdown. Debts, both public and private, have reached concerning levels, according to a McKinsey report[4]. Demographics are also a challenge. A rapidly aging population means a shrinking workforce and decreased consumer base.

Further exacerbating these issues are the ongoing trade tensions with the West and the COVID pandemic. The pandemic, with its lockdowns and travel restrictions, continues to disrupt economic activity. The real estate sector, a significant driver of China's growth, has been struggling with a debt crisis and a slowdown in construction. Post August 2020, when the Chinese government introduced the “three red lines” policy to contain the high leverage of property developers, the sector has been facing headwinds. Some of the largest players such as Evergrande defaulted on debt and left projects unfinished, which led prepaying homebuyers to boycott their mortgage payments. According to JPMorgan, realty players accounting for 40 percent of Chinese home sales have defaulted on their debt obligations since 2021[5]. Home sales have plummeted during the recent downfall, yet house prices have witnessed slight correction.

Importance of China and Global Repercussions:

China, accounting for roughly 18% of global GDP (PPP), is a major trading partner for most countries. A slowdown in China will inevitably have ripple effects across the globe. China is a major consumer of raw materials like oil, iron ore, and copper. A slowdown means less demand for these commodities, leading to a potential price plunge. This can hurt commodity-exporting countries

Further, China is a manufacturing powerhouse, and disruptions there can have a domino effect on global supply chains. Shortages of key components or delays in production can ripple through industries worldwide, impacting everything from electronics to automobiles. Impact of the aforesaid events shook investor confidence in Chinese economy. This is proven by lowest amount of FDI growth since the early 1990s[6]. This can lead to stock market volatility, currency fluctuations, and a general pullback in investments worldwide.

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Conclusion:

China's economic slowdown marks a significant paradigm shift. As per expert economists, by addressing structural issues, greater transparency, and implementing sound fiscal policies, China can navigate these challenges and mitigate the global impact. Furthermore, China's slowdown presents an opportunity for other economies. As China's dominance in manufacturing wanes, other developing nations can step up. This global economic rebalancing can lead to a more diversified and resilient international system.

#China #economy #globaltrade

[1] https://www.statista.com/statistics/270439/chinas-share-of-global-gross-domestic-product-gdp/

[2] https://databank.worldbank.org/

[3] https://www.china-briefing.com/news/chinas-gdp-in-2023

[4] https://www.mckinsey.com/~/media/mckinsey/mckinsey%20global%20institute/our%20research/the%20china%20imperative%20for%20multinational%20companies/the-china-imperative-for-multinational-companies_vf2.pdf

[5] https://www.livemint.com/companies/china-real-estate-trouble-country-gardens-entire-offshore-debt-to-be-in-default-if-payment-not-made-today-11697506983944.html#:~:text=So%20far%2C%20developers%20accounting%20for,dollar%20bonds%20outstanding%20since%202021

[6] https://economictimes.indiatimes.com/news/international/business/foreign-direct-investment-into-china-slumps-to-worst-in-30-years/articleshow/107800058.cms?from=mdr