Ever since China opened itself to the outside world and joined the global economy, its national economic growth has been nothing short of miraculous. Between 1989 and 2018, the average Chinese annual growth rate was 9.58 percent; however, as of December 2018, China’s year-on-year advancement was at 6.4 percent. The set of factors that have affected this change are numerous and multi-faceted, and they include demographics, the transformation of the Chinese economy into a system with market driven prices, the decline of Chinese exports, and the trade war with the US. This slowdown will negatively impact the world economy, given that it was Chinese growth that prevented the world from sliding into a global recession. The slowdown also generates a more unpredictable and less promising environment to possible investors. In addition to its effect on the global economy, the Chinese economic slowdown also brings great uncertainty to the country’s political future.
Demographics plays no small part in the Chinese economic slowdown. One of the major reasons for China’s impressive growth over the past four decades has been its giant population and work force. However, things have changed in recent years, owing in part to the unintended consequences of the “one-child policy,” as the Chinese began to age and its work force started to shrink. The Chinese government tried correcting and reversing this trend by introducing a “two-child policy,” though in vain, as in 2017, only 17.23 million babies were born in China -- a decline compared to the previous year. Additional factors impacting demographics include the growth of the Chinese middle class, as well as the urbanization of a country generating new expectations among the Chinese. Today’s Chinese do not want to focus on expanding their households but instead wish to maintain their standards of living. Moreover, this population is aging. All of these factors will put strains on the Chinese economy due to the resources that pensions and social funding will require.
In the past several decades, China has also undergone a decisive transformative process from a command, top-driven economy based on resource allocation by the communist state into a market economy with market-driven prices. This process has led to the emergence of a large and dynamic private sector which helped fuel the productive output of the Chinese economy. However, the contribution of the private sector is less pronounced as the transition to market driven prices in China is almost complete.
The decline in Chinese exports has also played a part in the current economic slowdown in light of the fact that the Chinese have profited off export-driven growth and an export-driven economy over the past four decades. Indeed, in November 2018, China’s export growth in US dollars fell to just 5.4% annually, compared to 15.5 % in October. Chinese export growth to the key markets of the international economy, including the US, the EU, Japan, ASEAN, Brazil, Russia, and South Africa, also marked a decline. Moreover, the trade war that the Trump administration imposed on China is also bringing new challenges for China and its economy. With the trade war going on, China is having a difficult time, relying on infrastructure investments to boost its economic growth and on public spending in order to augment investments to handle its growing debt. Indeed, debt remains a major challenge for the Chinese economy. Its debt is estimated to be 300 percent of the country’s GDP, following the trend of other emerging markets.
Global markets have also reacted to the Chinese economic slowdown, as evident from the stock exchange indexes of major Western countries. In Western Europe, the UK’s Financial Times Stock Exchange 100 Index (FTSE), Germany’s DAX, and France’s CAC all recorded a decline and lower points due in part to the Chinese slowdown. The major stock market indexes in the Asia-Pacific region, including Japan, Hong Kong, South Korea, and Singapore, also reacted negatively to news of the decline of Chinese export and growth. The US stock market recorded a decline in response to the Chinese economic predicament, as it is still skeptical on the prospect of a new trade deal between China and the US. In the background of the global market, there is a strong degree of uncertainty regarding whether China and the US will be able to strike a new trade deal, particularly in light of President Trump’s pledge to increase US tariffs on Chinese imports, valued at USD 200 billion, on 2 March 2019 should China fail to act on US demands. The shares of Chinese conglomerate Alibaba have also declined in turn, showing that even the largest companies in China feel the tremor.
Many are already talking about China reentering its lost decade, where it will be forced to focus on improving GDP per capita in order to improve the life quality of its citizens, as opposed to pursuing big-digit GDP growth. This brings new challenges for Chinese President Xi Jinping, who has been consolidating power in his hands since becoming president in 2012, as the Chinese Communist Party has, for decades, relied on dynamic economic growth as a source of domestic legitimacy. Within this turbulence, Xi could turn to compromise in talks with President Trump over a new trade deal.
Since 2008, the world has relied on Chinese resilience and its ability to continue its economic growth, essentially keeping the world from global recession as the sheer size of Chinese national economy maintained global economic growth. Now, there are troubling signs that this is no longer the case. The low output of Chinese factories is already endangering economic growth worldwide. Other industry sectors are also feeling the results of the slowdown, as oil prices drop. Foreign investors are not oblivious to the challenges as China is already recording a slowdown in foreign investments. In addition to negatively affecting China, this also shows that, in light of the slowdown, the Chinese market is no longer perceived as the promising and safe bet by investors as it was in the past. Several major US companies are already expected to lower their earnings forecasts as the Chinese slowdown is affecting their sales, among them the likes of Apple, Starbucks Corp. and Tiffany & Co. This economic slowdown has also negatively impacted a whole set of other sectors, as Chinese car sales, property sales, housing construction, foreign investments, and the job market have marked a decline. According to Bank of America Merrill Lynch, fear among investors is already extant, as they are holding on to more cash than in the past, fearful of the global economic disturbances that the Chinese slowdown might cause.
Beyond purely economic, market risks there are potential geopolitical ramifications. The long-term consequences for Chinese foreign policy behavior remains even more uncertain and much more troublesome. China, faced with slower growth, might be more inclined toward foreign policy adventurism in order to divert the public’s attention from domestic challenges. Moreover, the economic slowdown might inflame a Chinese sense of vulnerability to outside powers like the US, creating geopolitical frictions. China, burdened with slowdown growth, could also be more tempted to enter into geopolitical competition with the US, Japan, and India for access to foreign markets.