Why is Chinas Economic Growth Slowing Down - Essay Example

English Why is China’s Economic Growth Slowing Down? China’s economic growth will hit the lowest ebb in as stated in recent report published by the World Bank. However astoundingly, while the long-term trend indicates a slowdown, figures released by the Chinese government paint a more nuanced and mixed image of the economy. China single-handedly accounts for approximately one-fifth of the total world economic output; thereby, a slowdown in Chinese economy will hinder a global recovery. In addition, several of Asia’s largest and emerging economies have struck deal with China as a trading partner; hence, a downturn in Chinese economy will adversely affect them. Until 2010, Chinas economic growth rate was more than ten percent, which encouraged officials to boost domestic consumption combined with a reduction in exports to accomplish sustainable growth. Consequently, while the construction and industrial boom decelerated, the retail sales held up strong. Many of today’s economic issues can be traced back to the global financial crisis period between 2008 and 2009 when China attempted to accelerate economic growth through injecting capital and boosting government spending. Back then, the central government pumped tremendous amounts of money in the economy by investing in infrastructure and construction industries. However, on the downside, this created excess capacity, property prices soared sky-high with a simultaneous rise in inflation and consumer costs. Faced with these economic plights and the fear of Chinese economy overheating, policymakers then implemented measures aimed at curtailing lending and slowing down inflation. Unfortunately, these measures along with a sharp drop in the global demand for Chinese goods triggered the recent cycle of a slowdown. A fact that Chinese policy makers failed to take into account is that credit does no more good to economy than steroids do to body, every time bigger injection are needed to maintain the desired effect. In 2011, Chinese economic growth rate was 9.2 percent in contrast to the rate of 10.4 percent during 2010. Despite the imminent cyclical weakness that will decelerate China’s economy, even more, Chinese officials claimed that there is a way out. The World Bank has also supported this argument as it stated that the prospects for a soft landing appear positive, as China has largely mitigated the domestic property bubble invigorated by speculation. Chinese officials hold that they are working to temper the super economic growth towards more sustainable growth without triggering an economic recession. One of such simulative measures included the recent cut in interest rates after June by The People’s Bank of China. Likewise, the central government is striving to spur growth by relaxing reserve requirements so that bank lending could accelerate, which in turn would lead to greater injections of credit in the economy (Bradsher “Heavy Lending Creates a Surge in Chinese Economy”). Although, the construction and industrial sectors have registered a slowdown; however, retail sales have stayed strong. The Chinese government is determined to rebalance the economy by reducing reliance on investment and exports and escalating domestic consumption (Bradsher “Chinese Official Reaffirms ‘Rebalancing’ of Economy”). Policymakers hold that the government is empowered with myriad tools to prevent an economic collapse. They pointed out how unlike other major economies such as America and United Kingdom, China managed to survive through 2009’s recessionary period, marked by extensive layoffs and social unrest. Officials contend that they are deliberately aiming for sustainable growth after double-digit growth registered in the previous years that overheat the economy. Therefore, for them, the economic slowdown is solely a planned action. Official economic statistics released by China are futile in stopping the economic squabbling about the soft landing prospects for Chinese economy. The increasing stockpiles of coal clearly reflect the sort of indicator needed to prove that the Chinese economy is indeed heading for an economic catastrophe. Moreover, the chronicles of history reveal how recessions such as the Great Depression of 1939 deepened due to increased capital and credit injection in the economy. This is because these measures contribute more to inflation, which is the root cause for a vast array of economic problems (Reuters). Chinese policy makers should bear in mind that increasingly greater money injections in the economy would be required to maintain the desired effect. Their current policies fail to provide practical and feasible mechanisms to achieve sustained economic growth in the longer run. The economic growth rate in the second quarter of 2012 was 7.6 percent, even lower than 8.1 percent in the last three months, which is self-speaking evidence of economic downturn. Likewise, electricity output, which is another economic indicator used by analysts to measure business and consumer activity was registered as flat at 393 billion kilowatt-hours during June Undeniably, this is a clear proof that the world’s second largest economy is heading towards a downturn. The Asian Development bank also reduced its forecast of Chinese economic growth rate from 8.5 percent to 8.2 percent in light of the recent economic situation. Essentially, Chinese economy rose to the world’s second position by making a place in world trade. Therefore, turmoil in the global market has meant reduced demand from foreigners, particularly Europe and America, which was a severe blow to Chinese exports and manufacturing industries. Overall, the economy has decelerated much more quickly than initial expectations, and the ripple effect is especially visible in multi-national businesses. In times like these, it has become critical to strike a balance between the central government and market. In spite of the obvious economic crisis, opponents of the issue argue that the streets are unaffected by the economic slowdown as retail stores are packed with consumers. They are of the opinion that boosting investment will serve as a stimulus for stabilising growth. Thus, Chinese policy makers are loosening macro-economic controls as seen in the retail sector (Wong). However, even the policymakers attributed the economic slowdown primarily to the continued deterioration of the world market that dampened foreign demand. Therefore, it is integral for the policy makers to concentrate on both, domestic macro-economic controls as well as foreign exports. More resources should be diverted from the manufacturing sector into the service sector (Wassener). China should move away from being the world-manufacturing leader to the innovator in the global market. Development of service sector can serve as another area of growth for the Chinese economy, which is faced with the challenge of maintaining a sustainable growth rate and creating millions of employment opportunities. In the ultimate analysis, the downward economic pressure, consumer inflation, producer price deflation, curtailed private investments are irrefutable evidences of the downturn in Chinese economy. The argument of opponents concerning how increased credit and government spending will pump economic activity has only proven more detrimental for the Chinese economy. This can be witnessed in falling economic growth rate in every quarter and the uncertainty surrounding the upward rebound. Despite the fact that the Chinese economy performed relatively well in comparison to other developed economies during the recessionary period between 2008 and 2009; however, undoubtedly now Chinese economy is also undergoing serious pain. More than accelerated domestic consumption, global recoveries of foreign economies especially European and American are integral for stopping the economic downturn in China. This is because China justified its second ranking amongst the global economies by establishing itself as a leader in exports. Therefore, it is high time for Chinese policymakers to not only concentrate on domestic macro-economic policies but also to win back its global market share of exports, perhaps by developing tertiary sector. Works Cited Bradsher, Keith. “Chinese Official Reaffirms ‘Rebalancing’ of Economy.” The New York Times. Web. 10 Nov. 2012. —. “Heavy Lending Creates a Surge in Chinese Economy.” The New York Times. Web. 10 Nov. 2012. Reuters. “Pace of Lending Drops in China.” The New York Times. Web. 10 Nov. 2012. Wassener, Bettina. “Encouraging Signs in Chinese Manufacturing Data.” The New York Times. Web. 10 Nov. 2012. Wong, Edward. “Amid Calls to Open China’s Politics, Party Digs In.” The New York Times. Web. 10 Nov. 2012. Read More