China’s Slowdown: Impacts on the Global Economy and Prospects

Shanghai’s skyline. “Landscape photo of Night City” by “Wolfram K” licensed under Pexels

China, the second-largest economy in the world, is currently facing headwinds. According to the IMF, GDP growth is expected to decrease in the coming years, a trend that China has been experiencing for a few years now. That being said, growth still amounted to 5.2% in 2023. Beijing is facing structural issues, mainly revolving around capital inefficiency and demographic changes. But, will these issues prompt irrevocable impacts on China’s growth? If appropriate measures are not taken by the government, growth may be seriously hampered in the long term. 

Looking at such a situation appeases the numerous fears linked to China’s economic expansion in the world. However, this should not be the way we look into this phenomenon. While it is true that Chinese foreign economic presence must not be ignored, the hyper-globalized world we created would make a prolonged slowdown detrimental to the global economy. 

Current challenges

China is currently affected by a property crisis. The real estate sector has been a huge growth driver, accounting for more than 30% of growth at its boom. Deregulation and liberalization are what allowed such a rise when the Chinese economy opened up following Deng’s reforms four decades ago. Houses started to be seen as an investment asset and being sold before they were finished, with skyrocketing prices. More than half of the houses sold between 2013 and 2020 were not delivered to buyers. To stop this highly speculative bubble, China’s President Xi introduced tightening reforms to prevent house purchases for investment purposes, revealing the issue. This action caused prices to plummet and constructors and banks - many of which are state-owned - to default. 

In addition to this, China has been overinvesting in capital and infrastructural projects since the global 2008 crisis, accumulating a debt of 80% of the country’s GDP through state-owned enterprises (SOEs) and local governments, compared to 40% ten years ago. 

What has been a powerful motor for growth during the last decades is no more, confidence is shaken. At the forefront of this crisis, consumers are spending less, with consumption accounting for only 53% of GDP growth, much less than the 72% world average. 

Furthermore, China is plagued by a demographic change, partly resulting from the one-child policy carried out throughout the last few decades and the rising cost of raising children. Now, the working-age population is shrinking, coupled with an extremely low fertility rate of 1.18 children per woman as of 2022 and a high youth unemployment rate.

Global impacts

China's domestic issues are likely to have an impact on the global economy. According to the IMF, when Chinese GDP increases by 1 percentage point, other countries grow by 0.3 percentage points. 

First, considering China needs to focus on solving rising debt issues and stimulate spending, it may re-direct foreign investment to domestic resources. This has already been seen in Europe as of 2022, with Chinese foreign direct investment reaching €7.9 billion, a decade low. Belt and Road Initiative (BRI) countries may also experience a decrease in investment, with local banks not having the same lending capacities as before. As such, Sub-Saharan Africa is most likely to be struck the most, considering the large amounts invested by Chinese banks across the continent, making Beijing the largest bilateral lender in the region. Banks have already revised their loan commitments in the region, reaching a near two-decade low. In 2022, China’s foreign direct investment (FDI) to Africa was only US$1.8 billion, a huge decrease compared to 2021’s FDI of US$5 billion.

Furthermore, China’s overproduction and low domestic consumption have caused prices to fall, creating deflation. This will most likely have international repercussions through cheaper exports towards countries facing rising inflation such as European economies, ultimately benefiting them. However, China’s import demand has decreased and has been detrimental to Asian economies such as Japan, which experienced its first export fall in two years after China cut its cars and chips purchase. China’s exporting-reliant partners such as Brazil, Australia and a majority of Asian economies will suffer from lower Chinese demand.

Prospects 

That being said, it is crucial to situate China’s current issues within their historical context. Beijing has undergone vast economic development over the last four decades, registering an annual average growth of almost 10% since the first liberalizing reforms of 1979, driving more than 800 million people out of poverty. 

It is unlikely to see a Lehman-type crisis in China. Indeed, while distortions in the financial system exist due to state control, the latter also allows for coordinated banking policy and threat prevention. The Party’s control over its four main banks: ICBC, ABC, BOC and CCB, far exceeds bank regulations in European or North American nations. Furthermore, restrictions around the Chinese financial system have made it quite difficult for foreign investors to suddenly exit Chinese markets in case of panic. Consequently, a domestic crackdown is unlikely to occur in China, and even so, worldwide financial impacts would be limited.

The fact that rising debt levels are not owed to foreign creditors also makes the issue easier to deal with. Indeed, China practically owes money to itself, as it has extensively lent to SOEs and local governments. Hence, Beijing should have the capacity to solve this through massive bailouts for instance.

The American Presidential elections will be decisive for China. In the event that Trump is re-elected, we will likely see escalations in the trade war between both superpowers. In this case, Beijing will need to build its self-reliance and boost its latent domestic consumption to do so. Self-reliance is key in Xi’s policy, which has tightened control over economic policy to focus on the domestic goal of “common prosperity”, benefiting the poorer and remoter areas such as inland China. Trump’s victory would thus be a great test for Xi’s administration.

All in all, Beijing’s slowdown is structural. Debt-fueled investment growth cannot run indefinitely. China needs to find new drivers for growth like high-tech sectors, which also need to be accompanied by consumption that is currently lacking. Dealing with demographic pressures will take more time, thus prompting a need to strengthen social welfare systems and confidence.

China’s stumbling economy should not be ignored by the world, as it could always have unpredicted consequences. However, the analysis presents that strong state involvement and capital control mechanisms in the Chinese financial system make the likelihood of a national crisis affecting the whole world quite low.