China has long been one of the fastest growing countries in the world, becoming increasingly influential in finance and trade. For over three decades, China’s export industry alone grew on average 17% annually, and is one of the largest exporters in the world today. Since 1978, China’s GDP increased from less than $150 billion to over $8,227 billion in 2012. In recent years, however, China’s growth has slowed, raising concerns over global economic and market stability. China announced a growth rate of 6.6% for all of 2018, its slowest since 1990. In addition, according to the World Bank, Chinese monetary and financial growth waned, with the Shanghai Composite Index losing 20% and the Renminbi depreciating by 5.5% in relation to the U.S. dollar.
Defined by trade wars and investor uncertainty, 2018 was economically tumultuous to say the least, and not just for China. Globally, countries like the United States, Germany, and Japan have all faced slowdowns in economic growth, in part due to China. A further decrease in Chinese economic growth will certainly continue to unnerve investors and corporations, and could have significant impacts on the global economy.
In its annual economic update, the World Bank pointed to less investment and a slowdown in exports, due to an overall decrease in international trade and an increase in imports, to explain China’s economic slowdown. In addition, the trade war with the United States increased investor uncertainty and decreased overall FDI. The World Bank also predicted a continued decrease in Chinese growth to 6.2% for 2019-20.
In an effort to combat the slowdown, the Chinese government has introduced a series of policies and stimulus packages, including tax incentives and increased government capital spending. In its report, the World Bank recommended a shift in public policy spending geared toward health, education, and other social protections. The report further prescribed increased government spending across the board, especially in regards to lower income populations, highlighting that increased government support would increase overall worker productivity and an overall increase in equality.
There is significant disparity between urban and rural areas in China as well. Rural areas tend to receive less funding for public programs including education and health care. Bolstering rural social welfare programs, such as pensions, would help support rural workers better be able to meet the costs of basic needs and become more efficient participants in the national economy.
A persistent decline in economic growth for a major world economy would certainly have an impact on global trade and markets, but whether that impact is significant in the long run has been hotly debated since the slowdown began. For international corporations such as Apple, the slowdown has impacted sales in the Chinese market as consumers cut back on spending. Caterpillar, an American construction machinery maker, has reported a significant decrease in earnings as China spends less on infrastructure projects.
For many, the rippling effects of China’s slowdown on international companies, financial markets, and trade predict larger global implications. In a global context, the slowdown comes at a time of financial instability and political turmoil. International markets would certainly benefit from stability and projected growth from one of the world’s biggest economies, in addition to eased trade relations especially between the U.S. and China.
Other analyses argue that there is little cause for concern in regards to China’s slowing economy. One factor in the slowdown is that China is catching up to other major industrial countries technologically and financially. As the technological capabilities of China approaches that of countries such as the United States or Germany, it will be become more difficult to maintain the level of accelerated growth that is possible under a developing economy. In addition, high levels of investment, especially in large infrastructure projects, could lead to instability in property prices and the potential for a market crash.
In a 2012 report, the IMF warned against over-investment in China and the potential instigation of a crisis. In the same report, the IMF recommended a gradual decrease in the levels of investment coupled with policies that would maximize social welfare, similar to what was prescribed in the World Bank’s 2018 Chinese economic report. The transition from investment in physical to human capital would allow for China to increase overall productivity, wages, and improved living standards that would come with heightened domestic consumption. By bolstering domestic consumers and workers, the Chinese economy will continue to grow in strength and total output. From this perspective, the rate of economic growth in China is not as important as the level of overall added value to the economy.
Investment in workers and domestic consumers may not be enough in curbing China’s slowdown, however. A decline in overall population, due to population control measures such as the one child policy, is indicative of more economic problems than just a slowdown in growth. Despite having changed the one child policy to allot for two children per household, the population growth has continued to decline. China takes in relatively few immigrants a year as well, having given out only 1,576 permanent residence permits in 2016, which is certainly not enough to combat the decreasing birth rate. With an aging population and decreasing birth rate, China may soon face a problem of not having enough workers to maintain output and slow domestic consumers.
China’s economic outlook in the long run will depend on the actions taken in the next few years by the Chinese government. China has been able to mitigate short-term economic slowdowns in the past and many investors and businesses are hoping that it can again. With investment in the right sectors, the Chinese government can stimulate the domestic economy and increase overall economy health and growth. The most critical areas of government investment will be in social welfare. Strengthening consumers would not only stimulate the economy, but would ease the financial weight of supporting the aging population and cushioning the inevitable effects of the declining population. Strong domestic economic growth coupled with strong export performance will allow China to continue to increase its international influence and economic power.
The opinions expressed in this article are solely those of the author and they do not reflect the position of the McGill Journal of Political Studies or the Political Science Students’ Association.
Featured image by Thomas Depenbusch, via Flickr Creative Commons.