World Worried About China’s Economic Slowdown

Photo: Xinhua/Cheong Kam Ka

Even after witnessing a double-digit growth for nearly three decades, the Chinese economy has started showing signs of slowness. Although India has replaced the Asian giant as the fastest growing major economy of the world, the South Asian nation, like other countries across the globe, is worried about its northern neighbour’s slow growth rate. It is because China has come to a stage where anything that happens to its economy has global implications.

Through some key indicators, like GDP, industry, imports, exports, currency and foreign exchange reserves, we can explain why China has such an influence on the world.

The volume of China’s GDP was USD 10.3 trillion (in comparison to India’s USD 2 trillion) in 2015. The Asian power’s GDP has grown at an average rate of around 10% since 1991. By maintaining a steady growth rate for almost 24 years, China has become the world’s third largest economy behind the US and the 28-member European Union (EU).

However, the problem is that Chinese economy is slowing down. The country’s GDP grew at 6.9% in 2015. Although the growth rate was faster than every major economy (except India), it was slowest in 25 years. As China is one of the biggest importers of raw materials, like minerals, and also the biggest market for foreign companies, like Apple, a slowdown can reduce consumption, hurting those dependent on the Asian country to sell their products.

The share of industry in China’s GDP was 45% (in comparison to India’s 30%) in 2015. The country’s manufacturing Purchasing Managers’ Index (PMI), an indicator of growth in manufacturing activity, rose for the first time in March 2016 after falling for seven consecutive months. Despite the monthly increase, the PMI did not grow compared to the previous year. As a result, the manufacturing powerhouse is reeling under excess capacity, primarily in the steel, coal and real estate sectors. The stagnation means China is importing less raw materials. According to Bloomberg, China’s coal imports dipped 30% in 2015. It might have hurt Australia that accounts for 40% of China’s coal imports.

China, which is the world’s second largest importer after the US, also saw a 7% drop in import volumes to USD 1.6 trillion in 2015. The top three products that the Asian giant imports are crude oil, integrated circuits and iron ore, accounting for 30% of the total imports. China processes these goods into products, like petrol, electronic goods and steel. Interestingly, unlike coal, imports of crude oil, integrated circuits and iron ore increased in 2015. This would generally counter the argument that the economy is slowing down, but the problem is that much of the goods are produced (using these imports) end up being exported.

As far as export is concerned, China is the world’s biggest exporter of electronic devices (worth USD 215 billion) and steel (worth USD 30 billion). The volume of China’s exports was USD 2.2 trillion (in comparison to India’s USD 310 billion) in 2015. Big companies, like Apple and Microsoft, prefer to manufacture in China due to low costs. The problem is not much with exports as with under-priced exports, which are termed dumped by the importing countries. Dumping is claimed to damage domestic industries. Beijing exports its excess capacity because domestic consumption has been badly hit. The problem is exacerbated when China devalues its currency to make its low-priced exports even more attractive.

Over the past year, the Renminbi or Yuan – the official currency of the People’s Republic of China – has depreciated by over 6% against the US Dollar. Currently, the exchange rate of Yuan is RMB 6.47 against USD 1 (in comparison to India’s INR 66.65). Devaluation of the Yuan makes China’s exports more attractive. These exports crowd out those from other countries, which can prompt them to devalue their currency, triggering “currency wars”. This is why the devaluation of Yuan causes global markets to tank. Most countries do not devalue their currencies because such a move makes imports costlier. Countries, such as India, generally run a trade deficit. But with foreign exchange reserves of USD 3.2 trillion, China does not have to worry much about this.

The volume of China’s foreign exchange reserves is USD 3.2 trillion (in comparison to India’s USD 366 billion). Beijing has built this war chest by being a net exporter for the past two decades. Foreign exchange reserves help a country control its currency. China’s huge pile means that capital outflow – people taking their money out of the country – do not affect China much. Foreign exchange reserves also come in handy to pay off debt. At present, China is sitting on a total debt of USD 28 trillion, which is half of the world total. Out of this close to a USD 1 trillion is off-shore debt (loans taken from overseas sources). An economic slowdown in China puts this debt at risk. In case China defaults or even part of this debt, it will have a drastic impact globally.