1.0. Introduction
China is regarded as one of the strongest economies around the globe. Especially, within past three decades, it has gained massive impression through its rapid economic growth. It is not very long ago when China’s GDP crossed the figure of 14% and overtook several of well reputed economies of the world (The World Bank, 2015). Basing on this tremendous performance, majority of economists and analysts did not haste to forecast it to be the world’s strongest economy by the end of 2025 an indication of which is also given in the diagram given in the Appendix 1 (analysed from the standpoint of China’s economic outlook in 2010).
Nonetheless, the situation has taken a dramatic turnaround due to some highly impactful factors and the economic performance of China is seen slowing down within past few years. The GDP growth rate has sunk down below 8% which is about half of its level in 2006 (above 14%). It is also illustrated through the diagram in the Appendix 2:
Current situation has opened up new doors of debate and has set the analysts and economists throughout the world on analysing the current scenario in order to reach appropriate solutions. It is essential for China to come back on its road of growth, as the development of many of its trade partners and other countries is conditioned with the financial and economic stability of China (Huang, and Yu, 2013).
Current paper sets out to investigate into the critical external and/or internal forces that can be at the bottom of this economic downturn in China. Furthermore, the study also aims to analyse how current scenario is showing its side-effects on the world’s economy.
2.0. Short Term Factors Impeding China’s Economic Growth
2.1. Stimulus Plan and Burden of Debt
Under the stimulus plan, the banking sector has been issuing credit for investment on mass-scale. A clearer and more convincing idea of it can be gathered from the fact the total credit to GDP just before the recession took place was around130%. Not only had this, but the miscalculation about investment opportunities also led the government to rely heavily on debt. For instance, the total debt by the end of 2015 had grown to $28 trillion which is four times as much as recorded in 2004 ($7 trillion) (Rapoza, 2015).
Hence, it puts question mark on the value of stock market of China. Investors are getting alarmed by economic downturn and it is even worsening the situation. Rapoza (2015), in his article, also warns investors for mistaking China’s stock for the symbol of its economic stability. It is one of the most heavily indebted nations around the globe and its economic growth, especially in past few years, has been based on “debt addiction”. Hence, investors are losing their confidence in the Chinese stock market leaving the government with a further waning hope of recovery.
Debt is good for economy as long as it remains manageable. Wrong calculations and over-expectations can cause a situation of over-investment that affects the balance between supply and consumption, as in present case. Therefore, the government of China needs to devise a proper set of strategies to come out of this trap.
2.2. Recovery of Euro Zone
Countries in the European Union hold great importance for China with regard to its economic strategies. As a matter of fact, Chinese export policy is largely dependent on the strategic outlook of these countries. For instance, 20% of total exports of China belong to European Union, which is quite significant (Roucher, and Xu, n.d.).
China has been taking great advantage of issues and conflicts among different nations of this group that increased their reliance on import from China. The underlying country is considered the biggest trading partner of several of its members. However, since the middle part of 2011, euro-zone is being observed on its way towards sharp recovery. The most remarkable considerations in this regard are the settlement of sovereign debt crisis, and agreements of financial consolidations (Roucher, and Xu, n.d.).
Subsequently, these emerging scenarios have led to a situation of levelled off imports from China among the different members of European Union. Previously, export to European Union has been contributing to great extent towards the overall gross domestic production (GDP) of China. Therefore, aforementioned adjustments are great setback for it and it has to readjust its whole export plan in order to respond to this shrink in demand. Therefore, it can safely be said that the recovery in the euro-zone (despite its being a positive sign for member nations) serves as a negatively influential factor for the economic performance of China. It has reduced the demand for Chinese imports in one of its major global market segments.
2.3. Diplomatic Tension with Japan
In the past few years, the trade-relation between China and Japan was peaking till both the countries indulged into a conflict over the Senkaku Island. It resulted into a sharp decline on Chinese exports to Japan. For example, Chinese exports to Japan significantly rose to 2.2% in 2012, but fell dramatically by 0.9% as recorded in 2013 (Roucher, and Xu, n.d.).
Even though the issue can be short-term in nature and in years to follow, both the nations may seek an ultimate solution considering it in the best interest of both, its significance in combination with many other factors cannot be ignored. Furthermore, it may also show irreparable long term impacts one of the strongest of which is the loss of traders’ and investors’ confidence.
2.4. The Recession
One of the biggest economic downturns taking place in 2007 namely “The Recession” has also shaken the base of the Chinese economy as well as of many other small and big nations. Indeed, it caused unemployment on large scale due to closures of businesses at mass level. It led to mass reduction in demand resulting China to cut 2.2% of its exports in its wake (Asia Economic Institute, n.d.). However, it cannot be considered impactful in the long run, as many economies across the world are back on their road of growth after making strong comeback, and many others are showing the signs of recovery.
3.0. Long Term Factors Impeding China’s Economic Growth
The research shows that China for its growth in terms of economy is dependent on many variables. And, fluctuation (either short term or long term) in those economic predictors of China has multidimensional impact on its growth and development. Some of the most important of these factors are covered in this phase of discussion.
3.1. Changing Demography
Since 1979, China has been following a strict “one child policy” that disallows a family to beget more than one child. This policy was made a part of regulatory framework keeping in view uncontrollably growing population, which had already reached an alarming situation at the time of its execution (Fong, 2004).
The policy showed many positive signs on the economy and is being considered quite successful till it started to produce some negative implications. However, these negative impacts are not the products of the policy itself, but are based on inappropriate changes in the demographics of the region in the most recent years. Some of the challenges created by these changes are as follows:
3.1.1. Population Growth
Policy (as naturally perceived) resulted into gradual reduction into population, which is also depicted in the chart given in Appendix 3. However, it was the need of the hour at a stage, but cannot be considered favourable to the current business climate in China where heavy investment requires appropriate growth of consumption which is associated with keeping the population at a reasonable size. Hence, declining population is very likely to affect the economic growth negatively.
3.1.2. Working Age Population
One child policy caused growth in the working age population by the end of 2010 as it reached 70% of the total population. But, under the cyclic effects (as expected), the graph of working population has been undergoing a downturn for past five years, which is expected to continue in many years to come. The results of newly announced two child policy cannot be seen overnight, and it will take years to restore the whole situation. Current decline of working population is also illustrated through the chart given in Appendix 4.
3.1.3. Increasing Old Age Dependency
Old age dependency is growing at a sharp rate as a result of decline in the working population. And, it is obvious in a situation where percentage of youth is reducing more and more with every year’s passing.
All these change in the demographics of the Chinese population are critically impactful with regard to economy. It means that the percentage of people who can contribute to the domestic production is decreasing. Hence, it is obvious for the resultant situation to slow down the economic growth in the region. The government is going to replace this one child policy with two child policy with a view to brining the required balance, but it is very unlikely to have any immediate impact. It means that current imbalance will keep disturbing the economic growth in the long run.
3.2. Slowed Down Technological Development
However, following the Solow Model, the technological advancement has reached at its peak and is no longer as hard-to-imitate as it has been in earlier years. Furthermore, all these factors combined with growing competition in the global market have made it challenging for the country to stay consistent with its economic growth.
3.3. Appreciation of Yuan
One of the most contributive factors to the economy of China has been its cost-effectiveness. And, this cost-efficiency was based on the low exchange rates between Yuan and many other major currencies. China kept the value of Yuan low considering it in the best economic interest of the region. It has been a source of attraction for foreign investors (Anieri, 2010; Walden, and Thoms, 2007).
For instance, Apple Inc sourced China for manufacturing its mobiles for its being a low labour cost region. However, the Yuan is soaring in the aftermath of government’s reforms and the economic growth that the country has achieved in past years. It is causing many big investors to withdraw or break up the long established deals with Chinese firms. For example, currently Apple is thinking to get its production units back in the U.S due to shrinking gap between the labour costs between both the parent and the host country (Worstall, 2013) as also shown in figure given in Appendix 5.
Hence, the Chinese market is losing its competitive strength that was majorly based on the low exchange rate. Appreciation of Yuan coupled with growing wages has made it unattractive for foreign manufacturers and traders. Furthermore, it is also creating discouraging trade atmosphere for domestic exporters who cannot expect such big return on each unit they export as they have been under the depreciated value of Yuan.
4.0. Impact of China’s Economic Downturn on World’s Economy
As discussed earlier, China has become the centre of attention for many different nations across the world due to the tremendous growth that it has made over the past few decades. Many countries are bond in trader agreement with China, and many of them such as Australia, USA, and EU consider it their largest trading partner. Therefore, any fluctuation on the economic graph of China is likely to have a worldwide impact. Implications of current downtrend on the economic health of different nations are elaborated in the following part of discussion.
4.1. Declining Demand for Raw Material
Chinese industry has enjoyed excellent boom till a few years ago. It has led to boost in the demand of raw material that China has been importing from diversified countries basing on their specialization. For example, it sources to Sub-Saharan African countries to address its requirements of aluminium and platinum, while imports raw material for manufacturing electronic items from USA, Brazil, Australia, etc (Bryan, 2015) .
Current economic decline has forced it to reconsider its trade policy. For example, it has cut its exports from Brazil by 12%, South Africa by 32%, and Australian by 11.4%. Further details are provided in the figure given in the Appendix 6.
Since the economy of any country is largely based on its exports. And, as shown in the graph, the economic slowdown of China has disturbed the trade policies of several economies to great extent. Now they have to readjust their policies and look for alternative markets in order to survive, which is a challenging task to do.
4.2. Pressure to the Crude Oil Prices
Even though there are many external factors besides the demand and supply that determine crude-oil prices in the international market, yet the major part played by the forces of demand and supply cannot be ignored in this regard. And, no doubt shadows the fact that even small fluctuation in the crude oil prices shape or reshape the economic outlook of different countries (Naifar, and Dohaiman, 2013).
China is regarded as one of the largest importers of crude oil. And, the analysts all around the world could identify the strong impact of decline in the import of oil to China due to lack of demand in the region as a strong factors contributing to the present sharp decline in its prices (in past couple of years). Even though the prices were showing a tendency to go down as a result of many other factors, the current outlook of the Chinese economy has put extra pressure on it (Wildau, 2015). It is expected to serve as a long term threat, especially for the oil exporting nations.
4.3. Future Forecasts
Analysts consider that it can bring about another economic downturn, more intense as compared to recession, if the Chinese economy does not show immediate signs of recovery. Spence (2015), in his article dealing with the current subject matter goes even further to state that the world’s economy is going to enter into another historical challenging phase in the next year as a result of struggle economic growth of China. According to the author, his projections are based on the insight gathered from key economic indicators.
Furthermore, he argues that global economy regardless of any impact from the economic downturn of China is itself showing the signs of weakness. For example, corporate earnings are down, inflation rates are declining, and trade-figures are posing to be alarming. All this under the strong mediating impact of the lost economic strength of China is indicative of another major economic crisis on global level.
5.0. Conclusion and Recommendations
Certainly, to come out from the current economic downturn is a hard nut to crack for the government, as it is stemming from several long term as well as short term factors. Staggering Chinese economy has also given a tough challenge to many of its trading partners. That is why many of the economists and analysts predict the start of another global economic crisis in near future if the situation is not controlled through appropriate measures.
Now the government has two options. On one hand, it can stay indifferent to all that considering it the essential phase of economic cycle and hoping that it will be gone at its own in near future, and fearing that any intervention on its part may worsen the scenario. The second choice is to take the challenge to bring the economy on the track of recovery through appropriate reforms. As discussed in the discussion, the underlying economic crisis is of complex nature that requires a strategic framework to be tackled. Therefore, the government should reconsider its policies and intervene. Increasing the government’s spending, bringing the currency exchange rates down, and making strategic initiatives towards bridging the gap between demand and supply both on global as well as domestic level are some of the most practical recommendations in this regard.
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Appendix 1
(Hicks, 2013)
Appendix 2
(Mearns, 2015)
Appendix 3
(Nardelli, and Swann, 2015)
Appendix 4
(Nardelli, and Swann, 2015)
Appendix 5
(Alix Partners, 2015)
Appendix 6
(Bryan, 2015)
