Factors Impending Chinas Economic Performance - Example

FACTORS IMPENDING CHINA’S ECONOMIC PERFORMANCE Name Institution Professor Course Date Introduction Since the establishment of economic reforms in 1978, China has benefitted from unprecedented increased economic growth for three decades (Yongnian & Tong 2014). The economic growth has been spectacular with the country’s real GDP per capital doubling over the last three decades since 1980. The high economic growth was linked to the augmenting openness of the Chinese economy to foreign investment and international trade. However, at present, China’s economic growth rate has experienced a severe slowdown. The country is shifting away from manufacturing. China slowing economic growth rate hold negative impacts in the world economic because China is a trading partner of many economies in the world. According to Magnier (2016), China documented a decelerated growth rate in 2015. The country growth rate has dropped by 6.3 %, which is the slowest growth in 25 years. Although China’s economic growth is envy of most nations, the slowdown raises alarm. The country is fairing bad compared to the past three decades. The focus of this essay is on factors affecting Chinese economic performance and the impact the slowing economic growth of China has on the world. The paper highlights the causes and effects of the China slowing GDP. Causes The slowdown of the economic growth of China has triggered a great deal of concern among international trading partners that export their products to China. The Chinese president, Xi Jinping, stated that the actual Gross Domestic Product of the country over the coming five years would not be lower than six and a half percent. The first decade of the 21st century witnessed large structural transformation of Chinese agriculture and industry that affected both private and public sectors. The cause of the slowdown in the economic growth rate is as a result of the weakening industrial sector. The slowdown in South Korea, Japan and EU has lowered the demand for Chinese industrial products. The demand for exports has reduced. More so, imports to the country have also continued to drop dramatically (Spiegel 2015). For instance, imports values in the late 2015 were nearly nineteen percent lower compared to the previous year (See Figure 1). Figure 1: China’s total imports value and sectoral output Source: (Spiegel 2015) The sudden decline in the imports of China matches the country’s growth blueprint across diverse sectors. A powerful link amid reduced growth in industrial productivity and a reduced expansion in gross imports has been noted over the last fifteen years. According to Hodgson and Huang (2014), the slowdown of the China economic growth is as a result of intricate demographic, structural and institutional factors. These factors include demographic changes and the problem of supporting a bigger dependent population, lack of a well-established institutional (financial and legal) foundation for indigenous, developed private enterprise, and strict developmental limitations intrinsic in the existing system of residency registration and land rights. The changing age structure of the Chinese population is a key contributor to the China’s economic slowdown. The China’s one-child policy introduced in 1978 has lowered the birth rate. The 3 decades of the policy has lowered the number of working population. Each individual of working age supported 0.362 other persons by 2013 (Hodgson & Huang 2014). The situation has prompted an increase in the number of average old people and children who need support of every person. Another cause of the slowdown in China’s economic growth rate is reduced GDP. According to Hodgson (2015), Chinese GDP is lower compared to that of developed nations. Lack of democracy is also a contributing factor to economic slowdown in China. Notably democratic institutions promote higher rates of development compared to autocratic governments. According to Hodgson and Huang (2014), issues of property and land rights drag the China’s economy. The whole system of land utilisations promotes corruption and prevents skill development of a great number of the country’s population. Spending on real estate and large projects affects the country’s economy. According to Schreurs (2014), the Chinese government should stop provision of incentive for borrowing of funds aimed at funding large projects. This is because large projects increases the country’s GDP but in short-term due to bad debts. Although the debts taken during the global financial crises allowed China to influence its economic growth, the country was left with a huge burden of repayment. The real estate sector provides up to 30 percent of the country’s GDP including industries such as appliances, furniture glass, cement and steel. The increasing housing prices are hurting the country’s economy. There has been also a decline in China’s construction and automobile sector (Hodgson 2015). Effects China is one of the world’s largest economies measured by the quantity of services and good produced. The IMF expects China to account for nearly eighteen percent of the global economic activities. Therefore, the decline in the country’s growth from ten percent in 2010 to six percent holds great impact in the world’s economy (Zeilstra 2015). The decline in China’s GDP affects exports, investments, foreign direct investment, trading performance and partners. The slowdown in the country’s GDP also affects the prices of commodities. Zeilstra (2015) asserts that the economic decline of China affects nations through their commodity prices and export. Countries in Africa and Asia are worst hit. The high dependency on Chinese metal and exports make nations such as Zambia, Sierra Leone, Laos, Hong Kong and Mauritania more susceptible. The economic slowdown affect capital flows, commodity prices and trade. Nations that are dependent of China’s export are greatly affected. The degree to which a country is susceptible to external factors is dependent on its trading partners and export products. China is an important trading partner for several African nations since 2002. The Economic slowdown in China therefore affects business in Africa and other nations. The export of metal is affected by reduced demand and lower prices. China is the main user of numerous commodities. The country uses 40% of world coal, 40% of aluminium, 40% of copper and 20% of oil. As regard iron ore, China consumes 2/3 of the world demand (Zeilstra 2015). With the economic slowdown experienced in China, metal exporting nations will experience reduced commodity prices due to reduced demand of metal. The declining economic growth of China holds enormous effects on the global economy. The slowdown affects exchange rates and trade. The slowing growth rate lowers the growth of exports for nations that rely on the demand of oil, machine tools, materials and metals from China. Countries such as South Korea, Japan, Germany and Australia are greatly affected (Giles 2016). Japan and South Korea export to China while Germany is a producer of capital commodities to China. The slowdown also affects commodities and oil and triggers reduced oil and commodity prices. The price of oil has dropped since June 2015 following the beginning of the stock market slide in China. The reduction in oil and other products prices has dragged Brazil and Russia into deep recessions (Giles 2016). The slowdown has prompted reduction in oil extraction investments that has undermined section of US economy and sectors in other nations that host manufacturers of capital goods. The slowdown has also affected investments because investors have lost confidence in the country’s economy. The Foreign Direct Investment is gradually slowing down because of the reduced capital flows. China’s economic growth has been linked with increased savings levels and investments, exports and advancement of manufacturing. While the world economy suffers from the slowdown of Chinese economy, the middle class gains. The consumers will benefit from reduced prices of commodities, hence a rise in the number of middle class. According to Lanteigne (2015, p.50) in out of 256 million urban households in China in 2012, 54 percent were middle class having 60, 000 to 106, 000 renminbi in disposable income per year. The economic slowdown has triggered a transition from dependence on exports to consumption besides increased establishment of the middle-class. The economic growth slowdown has changed the consumer market through changes in commodity prices thereby benefiting the middle-class. By changing into a domestic demand-driven economy, the slowdown benefits retailers, consumer companies and consumers. However, the slowing growth negatively affects disposable household income. This is because the slowdown instigates unemployment despite reduction in commodity prices. The slowdown lowers disposable income thereby affecting several service and product sectors in the country and across the world. According to Smyth and Wells (2016), the slowdown of the Chinese economy affects net disposable income in different nations. For instance in Australia, the real net disposable income per capital has declined by 2.3 percent (Smyth & Wells 2016). The slowdown may negatively affect trade agreements between China and other nations. For instance, China is a greatest trading partner for Australia. The two nations signed a Free Trade Agreement in 2015 that made the economic relationship between the two nations deeper. The effects of the slowdown are not only in China but also in Australia and other nations that export or import to China. The slowing growth rate affects the entire global economy. For instance, the slowdown in Chinese shares has triggered stock markets across Europe, US and Asia to fall drastically. Conclusion The slowdown of China’s economic growth does not only affect China but also other nation of the world. China is the one of the world largest economy, hence a big force in the world economy. The slowdown is caused by several factors among them demographic shifts, the capitalist economy that prompts lack of democracy, issues of land and property rights and the weakening industrial sector. The economic slowdown affects imports, exports, trading partners, investments, FDI and commodity of prices. To ensure a healthy and sustainable economy, China should establish and implement reforms such as lowering spending on real estate and large projects that are connected to bad loans. The country should also embrace institutional reforms that concentrate of state efficiency, economic incentives and political structure. Giles, C 2016, ‘ World economy feels the impact when China takes a knock’, ft.com. Available from http://www.ft.com/cms/s/0/30441208-b548-11e5-b147-e5e5bba42e51.html [ 4 March 2016]. Hodggson, G 2015, ‘ Six reasons why China’s economy is weaker than you think’, The Conversation. Available from http://theconversation.com/six-reasons-why-chinas-economy-is-weaker-than-you-think-49388. Hodgson, G & Huang, K 2014, ‘ Brakes on Chinese development: Institutional causes of a growth slowdown’, Journal of Economic Issues, vol.47, no.3, pp.599-622. Lanteigne, M 2015, Chinese foreign policy: An introduction, UK, Routledge. Magnier, M 2016, ‘China’s Economic Growth in 2015 Is Slowest in 25 Years’, The Wall Street Journal. Available from http://www.wsj.com/articles/china-economic-growth-slows-to-6-9-on-year-in-2015-1453169398 [ 4 March 2016]. Schreurs, M 2014, ‘ 3 factors that will affect China’s GDP growth rate this year’, Global Risks Insights. Available from http://globalriskinsights.com/2014/03/3-factors-that-will-affect-chinas-gdp-growth-rate-this-year/ Smyth, J & Wells, P 2016. ‘ Australia’s economic growth defied fears over impact of China slowdown’, Asia-Pacific Economy, Available from http://www.ft.com/intl/cms/s/0/64c1de68-e016-11e5-b7fd-0dfe89910bd6.html#axzz41x5Z4o7K Spiegel, M 2015, ‘ Global fallout from China’s industrial slowdown’, Federal Reserve Bank of San Francisco: Economic Research, Available from http://www.frbsf.org/economic-research/publications/economic-letter/2015/november/global-fallout-from-china-industrial-slowdown/ [ 4 March 2016]. Yongnian, Z & Tong, S 2014, China’s evolving industrial policies and economic restructuring, UK, Routledge. Zeilstra, A 2015, ‘ Impact China slowdown’, Atradius. Available from https://atradius.de/reports/impact-china-slowdown.html[ 4 March 2016]. Read More