China’s economic slowdown

After three decades of skyrocketing double digit economic growth, it seems that the Chinese economy may finally be slowing down. According to the Irish Times, “Gross domestic product growth fell to a six-year low of 6.9 per cent in the July-September quarter and is forecast by the International Monetary Fund to decline further to 6.3 per cent in 2016. This level of growth is not enough to keep generating new jobs”.

On two separate occasions last week, the Chinese stock market plummeted at such an alarming rate that trading had to be called off. This recent economic free-fall has many investors and economists panicked as many are beginning to worry that the world’s second largest economy could be on the verge of collapse – and that such a collapse could bring about another economic recession which would be devastating, especially considering the fact that many nations have still not recovered from the 2008 recession.

To many, this turn of events is quite surprising considering how well China has fared in the past few years. The Chinese economy sailed right through the economic turbulence following the 2008 financial crisis and proceeded to grow at an unprecedented rate – yet in actuality, the sustainability of this incredible economic growth has been questioned by many economists for quite some time.

According to a 2013 article by Forbes: “China’s success story is based on a single economic mode, that of mass production of low-value manufacturing products using abundant and cheap labor, massive capital investment, and endless economies of scale. That growth prescription has lost its efficacy. The country’s changing demographics make this system increasingly unsustainable, as China’s aging population and rising wage costs eat away at the abundant supply of cheap labor.”

For many, this seems shocking as China has been consistently portrayed in the media as being an invulnerable economic and geopolitical juggernaut. The conception of China in the general public is clearly reflective of this view. According to an international study by Pew Research Poll, between “2008 and 2013, the median percentage naming the U.S. as the world’s leading economic power has declined from 47 per cent to 41 per cent, while the median percentage placing China in the top spot has risen from 20 per cent to 34 per cent”. This increasing concern that many have of China rising to become the world’s number one superpower is particularly evident in US politics as of late. US Republican presidential candidate and front-runner Donald Trump routinely notes that if elected president that he, “will beat China”. Yet, some economists see all of this fear, over both the economic collapse as well as geopolitical ascendancy of China, as being greatly over exaggerated.

Communist party meets to discuss opening of the “communist/capitalist” market / SCMP

Communist party meets to discuss opening of the “communist/capitalist” market / SCMP

In a CNBC article, HSBC economist, Frederic Neumann suggests that, “possible clues to China’s fate could be gauged from how the world reacted to Japan’s economic malaise” in the 1980s. He claims that at the time prior to Japan’s current economic malaise its, “global gross domestic product was about the same as China is today”. Neumann notes that even though the, “Japanese economy has failed to muster meaningful growth since then”, the world did not free-fall into economic catastrophe. Comfortingly enough, China is also more financially insulated than Japan was at the time and thus, the possibility of financial fallout is all the more mitigated.

Also, the reasoning as to why the Chinese economy would start losing traction the more its economy balloons falls well within the domain of conventional economic wisdom. Economic Convergence Theory, or the “Catch-up effect”, is the idea that when provided a stable environment for growth, developing economies will grow at a faster rate than already developed nations. As a nation becomes increasingly developed, its rate of growth begins to taper off and converge with other developed economies. This is because less developed nations can provide certain services for much cheaper than the more developed, and also they are not yet saturated with productive capital – which is to say, they have not fully realized their productive capacity until they have adopted more efficient production methods, technologies, and economic institutions, etc. – all of which can be replicated from their more developed counterparts. Yet, as income rises and the economy is fully saturated with productive capital, the now developed nation loses its competitive edge, as certain services are not as cheap to provide as before, and they can no longer simply acquire productive capital to increase productivity but must strive to come up with more efficient methods of production.

Beyond these economic concerns there is also the worry of as to how the Chinese government will respond to the situation and as to where China is “heading” in general. According to another CNBC article, “Analysts also point to Beijing’s unpredictable nature in addressing the country’s economic woes and market structure… It is also a lack of transparency in the country’s management of its economy and financial system that concerns China watchers”.

Some of the “unpredictability” of Beijing’s responses may stem from the fact that there is no longer a clear-cut consensus amongst party leaders as to how to handle the economy as it is becoming more developed, and where the nation is heading in terms of overall social and political organization. A Forbes article notes how Chinese leaders seem to be sending contradictory messages, such as Chinese Premier Li Keqiang, who has recently argued that, “China’s transition to a developed economy won’t happen while innovation and entrepreneurship are being stifled by too much bureaucracy”, and Chinese President Xi Jinping, who claimed, “economic instability demands even tighter oversight of society, and that it’s the duty of the Communist Party to come to the rescue of citizens and companies”.

Perhaps China will not return to its past explosive growth and at the same time not collapse into economic rubble. It just may be that as the Chinese economy becomes increasingly developed it will begin to face the slower rates of growth that seem to characterize most developed western economies. The Irish Times declares that these may be the, “days of the ‘new normal’ when the Chinese government is trying to sell the idea of slower, consumption and services-based growth and move away from the heady days of double-digit expansion which defined the economy for the past two decades”. One problem is that “The New Normal” is not near as exciting of a headline as “Economic Armageddon on the Horizon”.

Bob Smith
Assistant External News Editor

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