Monday, 29 July 2013

Good and Bad from Slowdown in China

When something is as inevitable as the growing dominance of China, the only option is to take the bad with the good.

It seems as if everyone is keen to know more about China.  The high level of interest is a result of both benefits and threats that China poses to the lives of us all.  China has an undue influence, be it the prices we pay for petrol or for running shoes, due to its dual role as a dominant consumer and producer in the global economy.  So slower economic growth in China and the reasons behind it will have effects that will ripple through the global economy.  But there will be good along with the bad and here is how it may play out.

Before starting on what might happen, it will be useful to look at the reason behind the slowdown.  The Chinese economy has reached a point of change in its development.  In the past, higher wages would prompt people employed in agriculture in rural China to move into the cities and work in factories.  This trend spurred the size of the economy to expand as these workers were being put to more economically productive uses compared to scratching out a living on small-scale farms. 

The first factories in China made basic goods such as clothing in the same way that the growth in textile factories was behind the Industrial Revolution in England around 200 years ago.  But as the economy has become more sophisticated, Chinese firms have invested massive amounts in new factories to produce more complex goods while the government has spent heavily on infrastructure.  But the driving force of growth came from the seemingly endless supply of cheap labour that would be put to use producing goods of higher and higher value.

But the end of economic growth fuelled by cheap labour and piles of investment seems near.  Rising wages in China are a sign that workers are proving tougher to find (refer to End of the end of the world).  Benefits from further investment are not as easy to come by considering the splurge in spending which lifted investment to around 50% of GDP compared to around 15% in the United States.  So the growth of a domestic consumer market as wages rise in China is seen as key as the next phase of economic development.  But the effects of this will not just be felt in China but across the globe. 

China has been the engine that is driving the meagre growth in the global economy.  Economies in places such as Germany and Australia have been kept perky by supplying machinery and minerals for the hungry Chinese economy.  Without this extra boost from China, the slowdown in the global economy would have been a lot worse even in countries which do not have links with China.  As such, a slowdown in China will be reflected in growth statistics across many other countries.  While the Chinese economy is still expected to expand by around 7% this year, the transformation of the Chinese economy from a manufacturing powerhouse to a consumer mecca is bound to be a bumpy ride and the effects of this on economic growth is still unclear (but there is good reason to be positive – see China brings out the Big Guns for more).

The economic rise of China has changed the shape of the global economy.  Everything from the price of coal to cows has been pushed upwards due to the seemingly insatiable appetite of the Chinese economy.  Much of the commodities have gone into providing the building blocks of the Chinese economy (steel girders and concrete slabs) and the fuel needed to drive the growing economy.  Less investment and slower growth will halt the upward rise in prices in some areas such as steel and other metals.  This will help lower construction costs all over the world and will be a blessing for places like Europe and the United States where investment has been weak. 

The slowdown in China is expected to provide other benefits for Western countries as well.  As shown by Chinese shoppers’ desire for luxury bags and shoes, demand for goods from overseas will increase as consumer demand picks up in China.  Whether it be producers of chocolate bars or fancy cars, there will be ample opportunities for Western firms to target Chinese consumers in the future as there will be strong demand for foreign goods until Chinese companies can build up their own brands.  The flipside of higher wages in China is that goods produced with a “Made in China” label will not be so cheap anymore.  Despite grumblings of firms faced with competition from exports, Chinese goods have been a boon for consumers in the West and have helped meagre pay packets go further.

For all of the good and bad, a slowdown is needed so that the Chinese economy does not implode under the weight of massive debts and reckless investment (for more detail, seeWhy China needs a slowdown).  The way forward will include some rocky patches but the rise of China is inevitable and will throw up challenges both within and beyond its borders.  Trying to fight it would be like trying to push back a rising tide – the only option is to make the most of it.

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