China's economic slowdown

A series of events has jolted China’s economy and rattled markets around the world. Early this year the Chinese stock market shed nearly a fifth of its value. Now the fresh data from China has confirmed its economy is continuing to lose steam.  China’s slowing growth has been dragging the global economy as Beijing hopes for a shift towards services and consumption in its domestic market.

Against the backdrop of a faltering global economy, turmoil in the country’s stock markets and overcapacity in factories, Chinese economic growth has slowed markedly. After growing 7.3% in 2014, the economy is thought to have expanded by 6.9% in 2015 and the Chinese central bank has forecast that it may slow further in 2016 to 6.8%.

Even China’s top leadership has acknowledged the serious challenge it faces in keeping growth apace. A series of interventions by policymakers, including interest rate cuts, have done little to revive growth and in some cases served only to heighten concern about China’s challenges.

China after witnessing nearly three decades of double-digit growth has been showing signs of slowness. Though China is trying to name this economic crisis as ‘economic rebalancing’, experts believe that if timely action is not taken the world’s second-biggest economy could be the source of the next global downturn.

Weak economy

Signs of weaker-than-expected Chinese growth, volatility of the Chinese currency and persistent capital outflows have led to growing anxiety in the financial markets. The country is burdened by weak exports, sluggish investment, factory overcapacity and high debt levels. The troubles of the world’s second-largest economy are also a major concern for global investors. The Chinese slowdown is also going to adversely impact economies that are closely linked with the country, such as the East Asian countries.

Once the dependable engine of rapid expansion, the world’s second-largest economy is now posting its weakest annual growth in 25 years. Factories are losing steam, exports are declining and companies have taken on worryingly high levels of debt. Millions of workers are not paid their wages. In the next two to three years, China’s growth performance is almost certain to deteriorate because of the overhang of its real estate problem, massive manufacturing overcapacity, and the lack of new growth engines.

There are almost more than 50 million vacant homes in China. Known as “China’s ghost cities,” there is an abundance of newly built urban areas complete with shopping malls, central squares, stadiums, luxurious condos, and villas-everything except people. In the city of Xi’an last year, a never-used 27-floor high-rise that covered 37,000 square meters was blown up and cleared away because it had been left vacant for too long and deteriorated beyond repair.

Given that one-fifth of China’s economic activities are related to the property market, the real estate sector accounts for between 25% and 30% of China’s GDP (if industries such as steel, cement, glass, furniture, and appliances are included), so it is impossible for the Chinese economy to regain momentum without reviving this vital industry. However, restructuring of the real estate sector will unavoidably depress short-term growth.

China has spent hundreds of billions of dollars in the past year to shore up the yuan, but still allowed two sharp devaluations of the currency that rattled global markets.

With China’s economic momentum slowing, money is flying out of the country. According to one estimate, $676 billion left China last year. With so much overcapacity in China and a lack of confidence in the future people are looking to overseas and moving out of the country.

Chinese leaders and optimist experts are of belief that China still has plenty of economic firepower. It has more than enough resources to deal with any immediate problems resulting from the difficult transition to a more sustainable growth rate. But there is not enough of an effective response and that’s really worrying.

The country’s appetite for resources-raw materials, energy, etc.-seemed insatiable. The government in Beijing was investing massively in infrastructure. Chinese factories were making goods and exporting them at a really fast clip. An overreliance on exports, however, can be unsustainable as it makes a country vulnerable to fluctuations in demand from abroad. Now Beijing wants to wean the economy off its traditional dependence on exports and extravagant infrastructure spending. For that reason, the slowdown is almost entirely a result of internal factors rather than external ones.

A lot of experts and observers had been warning for several years that a slowdown was coming, but their words fell on deaf ears. China, known for never coming out with true statistics, always portrayed a positive image of its economy, though it was falling down drastically.

The economy seems to be running into a dangerous downward spiral and even heading for deflation. As a result of the economic slowdown, the Chinese economic model, traditionally based on manufacturing, investments and exports, is currently transitioning towards a model focused on domestic consumption, services and innovation.

Reforms needed

Doubts have definitely been raised about Beijing’s ability to lay the groundwork for more sustainable economic growth, particularly after the stock market turmoil. Beijing has been trying to calm investors by injecting cash into the financial sector and preventing large shareholders from dumping their stock. But those measures have not had the desired effect.

China’s leaders are trying to reduce the nation’s reliance on manufacturing, and set up domestic consumption and investment as the new economic engines.

Beijing seeks to boost demand in the economy and shore up confidence among Chinese and foreign investors. But its leaders have made so many mistakes in recent months that they have turned what should have been a benign, natural slowdown into a chaotic descent. Officials could help create more jobs and make the economy more competitive by easing the way for private companies to get into industries like telecommunications and insurance that are currently dominated by a handful of state-owned corporations.

In the next years, China will need to wean off the regional governments, municipal administrations and non-productive state-owned companies that are currently supported for political reasons, but which produce little or no return on investment. Shadow banking, financial institutions and instruments that have gone unregulated, also needs to be brought under control, and the financial system will have to become more transparent if investor confidence is to be restored.

China now faces the tricky task of transitioning to much lower growth without stumbling into recession. Currently the urgency for broader economic reforms is needed. The main task is to make the most efficient use of resources, maximize productivity, and satisfy ever-shifting consumer demand. China has to invest in new enterprises, new industries, innovations, and services.

Doubts on the revival of Chinese economy are strengthened by the government’s failure to communicate its intentions. China’s leaders must realize that they need to modernize their policies by encouraging more private initiatives and greater competition. Their nation has changed dramatically over the last three decades, and the past approach of command and control to economic management will not produce the desired results.