“Impact Of the Slowdown of The Chinese Economy on Other Economies”
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Introduction
China established and maintained a centrally planned economy from 1949 to 1978. The economy grew potentially after reforms and restructuring under Den Xiaoping. The Chinese economy hit a GDP of $5 trillion in 2010, thus becoming the second-largest economy globally (Dizioli et al., 2016). The growth rate of the Chinese economy continues to slow down. According to the second quarter of 2019, the country’s GDP grew by 6.2 percent compared to the same period in the previous year. Arguably this is the lowest rate since 1992. In the first quarter of 2020, the PRC’s economy grew by 6.4 percent. Thus the average indicator for the first half of the year was 6.3 percent.
Economic Slowdown and Impacts on other Economies
China’s economic upturn has attracted the attention of researchers, government officials, and the business community for decades. If at the end of the 1990s, China accounted for about 4% of world GDP, but now China is the largest economy in the world in terms of purchasing power parity, in 2018, it accounted for 18.6% of world GDP. The share of Chinese exports and imports in world trade from 1995 to 2018 increased from 3% to 12.4%. Given the current role of China in the global economy, any changes in the growth rate of its economy or its structure could have a severe negative impact on the entire world and mainly Asia (China Briefing, 2019). That is why countries that maintain close trade and economic ties with the Middle Kingdom need to worry and closely monitor the economic situation in China, especially now that the COVID-19 pandemic has led to a drop in China’s GDP in the first quarter by 6.8 %.
China’s economic slowdown worsened in August 2020 as coronavirus outbreaks exposed a lingering weakness in consumer spending and cast more significant doubts over the country’s growth prospects. Retail sales rose just 2.5 percent in August year on year, far below economists’ forecasts of a 7 per cent rise and the slowest increase in 12 months. Industrial production, which was one of the main engines behind China’s world-beating recovery in 2020, also missed targets to add 5.3 per cent.
Numerous indicators signal a weakening of the economy in China. The purchasing manager indices compiled by the National Statistics Office have fallen noticeably. In the manufacturing sector, the mood reached its peak towards the end of 2017. In the second half of 2018, companies’ assessment of the situation deteriorated. The mood is particularly bad in small and medium-sized companies: here, the index fell again at 47.3 and 47.2 points, which was even below the expansion threshold of 50 points. Significantly lower share prices and declining sales figures for cars and smartphones complete the picture of an economic downturn.
China Briefing (2019) assesses the impact of the slowdown in the Chinese economy on the global economy, trade, financial markets, and commodity prices. The study covered the period from 1995 to 2015. In 2010, China began transitioning from a model focused on massive investment and exports to a model based on intensive growth factors and domestic consumption. This reorientation was because extensive growth factors were exhausted, and the economy began to slow down. Given the growing importance of the PRC for the global and regional economies, the consequences of the slowdown and changes in the economic structure will affect other countries. Researchers have identified three channels for the spread of influence on the world economy: trade, raw materials, and financial.
The slowdown in the Chinese economy is leading to a decline in New Zealand’s GDP. One percentage point slowdown in the economy translates into a 0.5 percentage point slowdown in New Zealand’s economy if it does not change its economic course.
The first thing is to consider the impact of the downturn in the Chinese economy on Asian countries through exports to China. Considering changes in the export structure of each country, most of the countries depend on China as a final demand location for their exports. Compared to 2009, the ratio for the US and Europe has decreased, while the ratio for China has increased. As of 2009, Taiwan was the largest value-added export destination in the United States, Europe, and China. However, in 2011 it expanded to Taiwan, South Korea, Malaysia, and Indonesia. Vietnam is the only country that has more sales for the United States and Europe than for China. As mentioned above, the importance of China as a final demand area for exports of Asian countries is gradually increasing. Therefore, the slowdown in the Chinese economy will cause exports of Asian countries to be larger than expected. One should think that it will push down. In particular, Taiwan and Malaysia are the final demand areas for exports. Dependence on China is higher than in other countries, and the downward pressure on exports due to the slowdown of the Chinese economy is relatively high.
The market for raw materials and mineral resources. In 2016, China accounted for more than half of Asian aluminium demand and 30% of nickel and copper demand. Raw material prices are highly dependent on the growth rate of the PRC. Metal prices are expected to fall as the Chinese model changes, GDP growth slows down, and environmental awareness increases. This will negatively affect commodity-exporting countries as they are most dependent on China (Inoue, Kaya & Ohshige, 2015). Also, the impact on oil prices will be weaker due to the lower share of China in global oil consumption (12%) and the expected increase in the number of vehicles per capita.
Financial market. The direct impact of the slowdown in the PRC economy on global and Asian financial markets, including securities and currencies, is likely to be minor, given China’s low integration into the international financial system and continued capital controls. However, the decline in uncertainty and Chinese activity created by the model change will impact investor confidence (Dizioli et al., 2016). In 2015, the People’s Bank of China devalued the yuan against the dollar by 4% to provide more exchange rate flexibility. As a result, Asian currencies depreciated significantly, as there were concerns in the market about the beginning of a competitive devaluation of the yuan.
Although the connection between the Chinese economy and the Japanese economy through trade is still strong, exports to China have become slower than before in recent years due to the internalization of production. However, the impact of income balance, service balance, sales, and profits of local subsidiaries in China will expand. The ties with the Chinese economy through third countries, especially in Asia, are deepening, and overall, the risk of a slowdown in the Chinese economy is increasing for the Japanese economy.
This Asian financial centre struggles numerous pressures due to China’s economic slowdown, political disputes and trade wars. It is expected that these pressures will soon push Hong Kong into an economic downturn. GDP shrank by 0.4% from the previous quarter in the second quarter. However, this figure does not reflect the impact of the protests for two months, especially for the tourism and retail industries (Inoue, Kaya & Ohshige, 2015). Both DBS economists and Capital Economics expect the third-quarter economic data released in November to show that Hong Kong will experience a technical recession-an economy with two consecutive quarters of negative growth is a technical recession.
Impact On Australia
The growth and prosperity of Australia have been boosted by the limited foreign direct investments (FDI), trade, and tourism from China. Being its largest trading partner, the slowdown of the Chinese economy had had a significant impact on Australia. China composes more than a quarter of Australia’s goods and services exports (Guttmann et al.,2019). Chinese investment cycle affects Australia as it is an exporter of industrial raw materials. The slowing down of the Chinese economy means mineral resources like iron ores imported in vast amounts to China will no longer be done, causing a rupture in Australia’s export industry. 80% of Australia’s iron ore industry’s revenue is generated from China. Reduction of export can result in adverse effects on the Balance of Payments, increasing the deficit and may also increase debt in the long term (Shafiullah, Selvanathan & Naranpanawa, 2017). A significant part of Australia’s tourism industry is influenced by Chinese visitors, as mentioned above. The slowdown of the Chinese economy declined the annual growth of the tourism industry to 1.1% in 2019, being the weakest in nine years. The tourism industry was affected, but difficulties were faced by the retail and catering industry, increasing unemployment.
The majority of investment in Australian real estate is done by China, increasing house prices, forcing people to buys real estate rather than housing, increasing inflation. The slowdown in the economy has not declined the growth in the real estate industry but has also caused a rise in the unemployment rate. Investment in the mining sector decreased by 90% from 2017. China’s investment in Australia has declined by 37.6%, from USD 10 billion in 2017 to USD 6.2 billion in 2018 (Guttmann et al.,2019). This continuation of reduction increased demand for outbound investment in high value-added sectors to bring back proficiency and superior products so that the evolving demands of Chinese middle-class consumers can be met.
Conclusion
The essay mainly focuses on the effect of the slowdown of the Chinese economy on Asian countries. It first talks about the trade and investment linkages followed by the impact on Australia. At last, it talks about the indirect impact of the slowdown. The threats related to the slowdown of the Chinese economy have affected Australia and all the major countries around the world like India, Japan, Indonesia, and Vietnam among others. Major economic components like GDP, the balance of payments, real income were affected adversely. Being one of China’s important trading partners, Australia has faced many problems that should be handled gracefully.
References
China Briefing, (2019), “How a China slow down could affect your business,” available at: https://www.china-briefing.com/news/china-slowdown-affect-business/
Dizioli, A., Guajardo, M. J., Klyuev, M. V., Mano, R., & Raissi, M. M. (2016). Spillovers from China’s growth slowdown and rebalancing to the ASEAN-5 economies. International Monetary Fund.
Guttmann, R., Hickie, K., Rickards, P., & Roberts, I. (2019). Spillovers to Australia from the Chinese Economy| Bulletin–June Quarter 2019. Bulletin, (June).
Inoue, T., Kaya, D., & Ohshige, H. (2015). The impact of China? S slowdown on the Asia Pacific region: an application of the GVAR model. S Slowdown on the Asia Pacific Region: An Application of the Gvar Model (October 14, 2015). World Bank Policy Research Working Paper, (7442).
Shafiullah, M., Selvanathan, S., & Naranpanawa, A. (2017). The role of export composition in export-led growth in Australia and its regions. Economic Analysis and Policy, 53, 62-76.
