According to the Economist Intelligence Unit (The Economist, 2016), China’s GDP growth last year (2015) was 6.5%.
Can we tell any story from this number?
Well, it is positive, should it be considered good?
Wall Street Journal reported that it was the lowest growth of China in 25 years, showing the sharply slowing down of the economy. It was since 1990 that China had lower growth rate than 6.5% (China’s growth in 1990 was 3.9% according to the World Bank). Following by the report of growth for the first quarter of 2016 which was 6.7% (BBC.com, 2016), China had the slowest first quarter’s economic growth in seven years.
Long-term China’s growth path is converging to a stable path (World Development Indicator, 2016). Rising dragon is not quite rising anymore.
What are the reasons behind China’s economic slowdown?
Looking at the important factors of GDP growth, I drew a graph showing export growth, government consumption, capital formation, and household consumption expenditure growth to see what happen to the GDP components.
From the graph, you will see that the export growth of China had dropped sharply during 2006-2009, rose again in 2010, but had been decreasing after that. We therefore can see the evidence that the export sector is the main reason why China’s growth had been stagnant. The Chinese government consumption expenditure had a stable path since 2005 but also started to drop after 2013.
The sluggish export sector has already affected the middle-class Chinese in the industrial cities who have jobs in the manufacturing factories. If the overall economy cannot pickup in the next few years, other classes (the wealthiest and the poorest) in China will finally be suffering from the depressed domestic demand. The poorest group of people will be hurt the most if the government has to move its resources to help the industries and cut down the welfare.
The export sector of China has been slowing down from the uncontrollable sluggish demand of the Europeans and Americans, the only one key to maintain the economic expansion is the domestic sector, both investment and consumption.
From the graph, China’s household consumption (% of GDP) has an decreasing trend. After the Asian financial crisis in 1997, Chinese save more and spend less. The consumption component of China’s GDP therefore has potential to drop even more and make the situation worse.
The government sector has already been trying to pour money into the infrastructure investment. However, Chinese private companies as well as State-Owned Enterprises are showing signs of reaching the limit of demand. The best example is so-called ‘ghost cities’, showing empty towers and apartments which no one lives in. The real estate bubble in China has already been blow up by the local government to the point that it is ready to burst.
Downtown Yujiapu, dominated by newly-built skyscrapers is a ghost town. Photo: AAP (https://au.pfinance.yahoo.com/money-manager/real-estate/article/-/24358644/future-shaky-for-chinas-manhattan/)
Another big problem is debt. When a country is having debt, it does not imply that the country is in a problem, as long as the borrowing is used for the growth creation. China has accumulated the external debt stocks over time, especially in the private sector. Overall, Chinese government, corporate and household’s borrowing have been strongly increasing. Unfortunately, Chines debts creates less and less growth. According to the Economist, “China requires more and more credit to generate less and less growth”. (The Economist, 2016). Debt payment burden will become harder when the business sector is not supported by foreign and domestic demand.
I know, all of these does not sound like a bright future of Chinese economy. But we all learn from good and bad experience. China can learn a lot to build a stronger economic structure from this potential recession.
How about the effects of China’s slow growth to the United State? That is an interesting question that I will try to answer next time.
See you next blog!
All graphs are constructed using World Development Indicator from the World Bank database.
Magnier, M. (2016). China’s Economic Growth in 2015 is Slowest in 25 Years.Wall Street Journal, January. http://www.wsj.com/articles/china-economic-growth-slows-to-6-9-on-year-in-2015-1453169398
The Economist (2016). The Coming Debt Burst. http://www.economist.com/news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-coming-debt-bust
BBC (2016).China GDP: Economy Slows to 6.7% in first quarter. 15 April 2016. http://www.bbc.com/news/business-36051327