Why Is a Slowing China Economy a Global Concern?

China is a key driver of global growth, but expansion in the world’s second largest economy is sputtering.

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The official forecast of 6-6.5% growth is the slowest on record, and the 6.2% reported in the second quarter is the weakest since the government began releasing quarterly data in 1992. 

China’s $14tn economy, second in size only to the US, accounts for almost a third of global growth each year. That makes it a vital driver of job creation and improved living standards everywhere. 

The advanced age of the US expansion - more than a decade – and worries about Europe make China’s pace of continued growth that much more important. 

If China’s current slowdown were to suddenly accelerate, the ripple effects could squelch the global recovery. A severe slowdown in China could shave 1.5% points off US gross domestic product growth over two years, according to a report by Bloomberg Economics. 

The most obvious and recent cause for China’s economic troubles is the trade war with the US. It’s also conspicuous that such a breakneck pace of growth can’t continue forever. 

China’s population is ageing and there are fewer working-age adults to drive output. There are also fewer easy investment opportunities, like building missing infrastructure. The debt mountain means more activity has to go to paying back the spending of the past. 

The economy is loaded up on debt. Slower growth challenges China’s ability to stem the buildup of its government, corporate and household debt, which according to Bloomberg Economics is on track to add up to more than 300% of GDP by 2022. 

The bigger that debt pile becomes, the harder the impact on global growth should it all go sour. 

The trade war is hurting China’s exports as US tariffs bite and is causing imports not only from the US to plunge, but also those from Japan and South Korea. Bloomberg Economics estimated the cost to the global economy from uncertainty over trade could be $585bn in 2021.

With no resolution in sight for the US-China trade war, things will probably get worse before they get better. Business confidence and activity are looking shakier across the globe. In Asia and Europe, factories are already feeling the brunt, while growth signals in the US have been mixed. 

For sure, there are signs of fundamental changes at the highest levels in China under President Xi Jinping. After decades of focus on hitting growth targets delivered breakneck expansions accompanied by fouled air and water, a shift towards more balanced development for the economy is conspicuous. 

China’s central bank in September said it would inject another 900bn yuan ($126bn) into the economy by cutting the amounts banks have to hold in reserve, in a bid to stimulate lending. A fiscal stimulus plan including about 2tn yuan of tax cuts is slowly feeding through into the economy. 

The enduring challenge for China, however, is how to wean the country off its debt drip without intensifying an economic slowdown, not just in the country, but across the world. 
A slowing China, undoubtedly, is a global concern.

_{The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Al Bawaba Business or its affiliates.}