The Strategist

China's Economic Growth Slowdown

03/09/2015 - 18:47

The deceleration in Chinese growth is a sign of worry for global economy.

Despite sharp decline in crude oil prices and sound recovery by the US, IMF revised the worldwide economic projections downward. China’s slow growth played a vital role in for downgrading IMF’s outlook for world economic growth. A deceleration in China’s economy amidst global economic uncertainty particularly in the Eurozone could have dramatic implication across the globe. China slashed its target economic growth rate to nearly 7% for the year 2015. This indicates the slowest growth rate recorded over past 24 years.

China became the second largest economy in the world after the US by following a fast growth model where China was largely dependent upon credit driven investments. But this growth model led to various challenges including mounting government debt levels, inefficient investments, property bubble and environmental degradation. However, under President Xi Jinping, China is shifting to a better and quality economic model which is more reliant on market forces particularly consumer demand. After a slight rebound in the economic growth in 2014 end, china is again witnessing slowdown since the start of 2015. Presently, China is witnessing a significant change in its economic and structural reforms for sound and stable economic development. Hence, China is expected to experience a budget deficit of nearly 2.3% of its GDP for the year 2015.

China’s boom in the housing sector is going down led by slump in prices in different cities of China. A substantial upsurge in housing supply that surpassed demand recently coupled with macroeconomic troubles have caused decline in housing prices. The anti-corruption campaign has also created an adverse impact on the Chinese economy. Although the campaign has gained widespread support, yet its detrimental effect over china’s political stability that is the vital economic pillar, cannot be overlooked. Besides, slower industrial production is believed to be an important drag on China’s growth for 2015. Infrastructural investments by the government should limit the industrial slump yet it is doubtful to provide considerable stimulus. This is mainly due to the fact that ongoing structural reforms along with plunge in property market is expected to constrain the amount to which the government balance sheets should have been used for boosting infrastructure and pumping the economy.
China’s export revenue escalated for the first 2 months of 2015, stimulated by remarkable performance in February as a result of Lunar New Year, while declining imports indicated economic weakness. A substantial drop in imports indicating low domestic demand coupled and fear of deflation shook investor’s confidence over the country.

China’s central bank lowered its interest rate for the second time within a span of just 3 months which is another indication of worry. This step has raised fear that the government is devaluing its currency in order to boost its exports. However this surge in the exports will probably have small life if other rival countries pulled down their currencies further. Over the past decade, China has implemented three major financial reforms including, interest rate cuts, internationalizing Yuan and opening capital accounts. Meanwhile rising deflationary pressures need easing of monetary policies. China’s economic growth is expected to witness further moderation due to implementation of structural reforms.