April 22, 2024
World Economy

What does a slowing Chinese economy mean to the world?

The US, the world’s number one economy is shining. And the second largest, China, is slowing down. Any change in the Top Two means big news for the whole world – for better or worse. For Bangladesh as well, low inflation and high employment in the US are good news as they will spur consumer spending and generate more orders for apparels. On the other hand, slower growth of China means a lot more for Bangladesh, which sources most of its industrial raw materials from the Asian powerhouse.

China’s slowing has the western media and economists speculate how it might turn out if Donald Trump, who waged a vigorous trade war with China, makes a comeback to White House. China’s social media and a section of the elite are weighing the economic impacts of the prospect of Trump’s victory: Will $360 billion imports, covering 60% of American imports from China, will come under heavy duties as planned by Trump in the past tenure? Or, Trump’s “go alone” approach, his contempt for alliances such as Nato, would undermine the American-led security system in Asia, which might make China stronger, an article in The Economist asks.

If the trade war gets worse, the impacts will not be limited to these two economies alone. Though the world seemed to have averted a much feared recession last year and many economies have succeeded in taming inflation, prospects are not that bright for many.  Bogged down heavily by a slump in real estate, which once shared a quarter of its economy, China is in deflation with fall in exports, imports, production and consumptions. Prices in China declined in three quarters in a row, marking the longest deflationary streak since the 1990s financial crisis. Japan slipped into a recession last year, vacating its third slot in global ranking to Germany. Germany’s one notch gain is not because of its own strength, it is because of Japan’s unexpected decline. With Europe’s biggest economy in danger of shrinking further and the UK in a “mild recession,” the prospect for the rest of Europe is not encouraging.

In contrast, the US economy is all smiles, with plenty of jobs on offer, consumers on a spending mode, strong dollar and record high stock prices.

“The US economy will continue to outshine economies in much of the rest of the world this year, particularly in China and Europe,” says Mark Zandi, chief economist for Moody’s Analytics.

Being the world’s largest, the American economy influences the global economy a lot. But can it alone drive the global growth up while China, Germany, Japan, and the UK, respectively the world’s second, third, fourth and sixth, fall behind more and more?

Bloomberg warns, relying on the US to power world growth poses risks for other nations as well as the US itself. High interest rates and the strong dollar help the US economy grow stronger, but they put a burden on emerging markets, the US-based platform of business news and analysis says.

Despite its slow growth, China still remains the hope for the rest of the world, more specifically, for the developing and emerging countries.

While relying on exports to rich economies in America and Europe, they will require supplies from China. When consumption and production fall in China, the whole world hits a bump because China produces goods for the whole world and it alone consumes the most of the global supplies.

When the US sneezes, the rest of the world catches a cold. But what happens to the world when China slows? China accounts for more than a third of global growth, if its economy slows, it will be felt beyond its territory. In a report BBC quoted analysts who believe worries of an impending global catastrophe are overstated, but effects of China slowdown can be felt in the sales of global multinationals who rely heavily on the China market.

The US credit rating agency Fitch said China’s slowdown was “casting a shadow over global growth prospects.”

China aims to end sole reliance on property and free up capital and credit resources to support new kinds of investment like high-tech, agriculture, and green energy.

It is this kind of investment, rather than more empty buildings, that China needs to protect itself from hostile trade policy and the future risk of Western sanctions.

Even under the best of circumstances, the economic transition that China is aiming for would be very tough. Add to that the challenges of a shrinking and rapidly ageing population, a falling price level, a number of hostile trading partners and largely unhappy households, and China’s economy will be a growing source of concern to policymakers worldwide, warns UK-based Royal Institute of International Affairs, Chatham House. 

China accounts for around 40% of global growth. Low consumption in China means fall in exports of many countries like Australia, Brazil and several countries in Africa.

Weak demand in China means lower prices for goods produced by global manufacturers, which will cast shadow on production and employment in many economies.

Cheap China sounds good, but not for long

If prices of supply from China fall, it may benefit some countries in the short term, but it will not be good for the developing world in the long run. “When the American economy is strong, we expect more orders for apparels,” says Md. Fazlul Hoque, a former leader of the knitwear association in Bangladesh. If China’s growth slows, prices of raw materials sourced from there may see some declines, he thinks. “But it will be a short-term phenomenon. It will not be good for the global economy if a slowdown prolongs in China,” says Fazlul, managing director of Plummy Fashions, a leading apparel exporter.  

A slowing China will be a concern for more than 150 countries who received Chinese money and technology to build roads, airports, seaports and bridges.

China may yet come out strong

However, there is hope for China’s economy. Despite predictions that China’s growth may be slow in 2024 and beyond, none of this means a financial or economic collapse is inevitable in China, Eswar Prasad, professor in the Dyson School at Cornell University, writes in an IMF publication in December.

Though tensions between China and Western democracies also factor into predictions of an economic downturn, the evidence thus far “does not suggest that a hard landing is in the offing” in China, Ali Wyne, senior research adviser at the think tank International Crisis Group, tells the Voice of America.

China has faced economic slowdowns before and even then it achieved stellar growth for decades. But the challenges now are bigger and from many fronts at a time, making headwinds for China’s growth more intractable than those in the 2010s or early 2020s.

All the problems are not economic, there are policy issues which, as businesses find, have braked hard on the fast-growing sectors that have driven the Chinese economy up for the past decades, dampening confidence of both investors, manufacturers and consumers. 

The IMF in a report recommended that the Chinese government encourage its citizens to find new means of investment and pursue market-oriented reforms, among other means, to boost the country’s economy.

If it does not happen, the economic slowdown may prolong in China and the economic future of many emerging countries will falter as well.

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