I was reading an article in Bloomberg about the impact of slowing growth in China on the rest of the world. I found it fascinating and thought I would share some of this with you.
At face value, the fact that economists are forecasting a 6.2% growth rate in China this year does not seem as a cause for concern. This growth rate is however down from 6.6 percent in 2018 which at that rate was already the slowest in almost three decades.
1. What explains all the worry?
China’s economy accounts for almost a third of global growth each year and at $13 trillion is second in size only to the U.S. The advanced age (more than nine years) of expansion in the US economy and worries about growth in Europe make China’s pace of continued growth that much more important to global growth.
2. What’s wrong with 6 percent?
At more than twice the global rate, 6% would at face value appear to be something to celebrate as opposed to being a cause for concern.However, China’s economy is loaded up on debt and its ability to service repayments depends on rapid growth to generate the profits and tax revenues needed. Slower growth challenges China’s ability to stem the build-up of its government, corporate and household debt — which according to Bloomberg Economics calculations is on track to add up to more than 300 percent of GDP by 2022. The bigger that debt pile becomes, the larger the impact on global economic growth should it collapse.
3. How’s the slowdown being felt?
The most well-known impact was on Apple Inc. who cut its revenue outlook for the first time in almost two decades, citing weaker demand in China. This had a profound negative impact on global equity markets. Starbucks Corp, which has been opening a new store in China every few hours, saw its same-store sales growth begin to slow in 2018. Jaguar Land Rover shut a U.K. plant for two weeks in October and put this down to sinking demand in China. Chinese consumers accounted for roughly a third of the $121 billion spent on luxury goods worldwide in 2017. Many of those purchases are made outside China, making companies like Louis Vuitton, Gucci and Hermès heavily dependent on Chinese tourists. The whole travel and tourism sector is especially nervous. About one of every four jets that Boeing Co. builds is bound for China and it accounts for more than a fifth of the money spent annually by tourists traveling outside their homeland. This is almost twice as much as the next-biggest spender, the U.S.
4. How bad could it get?
Bloomberg Economics has forecast that a severe slowdown in China could shave 1.5 percentage points off U.S. GDP growth over two years (severe was defined as a drop in growth to 2.4 percent, or similar to China’s experience in the global financial crisis.) Among commodity exporters, Russia would be hurt the most. Trade-dependent Singapore and Hong Kong would also suffer badly. Taiwan, Thailand and other countries that feed components to China’s massive manufacturing machine are also threatened. An analysis by Deutsche Bank AG estimates that while China notionally exports about $45 billion worth of mobile phones to the U.S., for example, more than 80 percent of the value comes from parts imported from other Asian countries as well as American-owned intellectual property.
6. Why is China growth slowing?
Simply put, because such a breakneck pace of growth can’t continue forever. As the country ages, there are fewer working age adults to drive output. There are fewer easy investment opportunities, like building missing infrastructure. And the debt overhang means more activity has to go to paying back the spending of the past. Compounding the situation is the trade standoff with the U.S. as well as President Xi Jinping’s “critical battles” to reduce China’s massive debt pile and clean up toxic air pollution. Retail sales, long a pillar of the economy, aren’t growing at the breakneck pace of years past either. The auto industry in 2018 posted its first drop in annual sales in nearly three decades.
7. What’s China doing?
Trying to walk a fine line. The fire-hose stimulus that followed the global financial crisis kept China from a Great Recession like the U.S. suffered but swelled the debt mountain. Now it’s trying to do just enough to prevent a hard landing — where the economy flat-lines or flirts with recession — while avoiding another debt buildup. It’s rolling out measures to stimulate sales of cars and household appliances and is looking at widening this year’s fiscal deficit. It softened its long campaign to clean up the banking system, cut taxes, added infrastructure projects, eased monetary policy a tad and increased bond financing. After cutting the amount some banks have to hold as reserves four times in 2018, in January it announced the first cut for all banks since March 2016, a move to encourage banks to lend. There’s also been an unprecedented push by senior officials to cajole lenders into making more loans to private companies, which employ the most workers.