Laura Obdeyn - Slowing Chinese Economy

Since 2000, the Chinese population has been rapidly expanding, and the economy with it.  However, the forward momentum was lost in 2012; the economy continued to grow, but at a noticeably slower rate.  In fact, the current growth rate of the Chinese economy is the slowest it has been in the last eleven years.  Industrial production is at the lowest rate since 1999, as are imports and exports.  The target growth rate for 2013 was 8.5%, but data collected in May of this year showed an average of 7.5%, and in some industries, an all-time low of 1% growth.  As all these values are positive, the economy is not shrinking, but it is not growing fast enough to keep up with the extremely fast population growth. 

Included in the main causes of the sudden growth decrease of China’s economy is the focus of the industrial sector, housing inflation, and competition from other countries. 

Beginning in the 1980s, China took a turn towards factory production as its main industry.  Over the years, they have been extremely successful in this industry, producing goods at extremely low cost and exporting to other countries at bargain prices.  However, other countries such as Bangladesh and Indonesia have begun to rise up as major players in this industry, and are able to produce goods at an even lower cost than China.  As a result, big companies are moving to these other countries where mass production is cheaper, leaving the Chinese factory industry with large numbers of empty factories and large amounts of debt.  If China wishes to maintain the size of its manufacturing industry it will need to lower its prices to compete with other countries, which could potentially lead to more debt.

In an attempt to find success in another industry, the Chinese government encouraged factory owners to look towards ‘green’ technology.  Over the last five years China has spent billions of dollars on the production of solar panels, quickly becoming the world’s largest producer of solar technology.  The government is encouraging the industry to expand, as it has been creating jobs at all levels of the supply chain, but they are disregarding the larger costs, including the construction of new factories, and the fact that they are currently producing more than they can sell.  Though solar energy is a popular technology, it is not popular enough to generate the high demand that China requires to remain profitable. 

In addition, there are two main causes that go hand in hand: the government’s attempt to save money, and the availability of work.  Because the government is trying to cut back on unnecessary costs to prevent a slide into debt, health care and pension plans are almost non-existent.  As a result, families and individuals are forced to save money for emergencies and care of their loved ones, which leads to less circulation of money in the domestic economy.  Because less money is flowing within the country, local businesses are less willing to expand and many are downsizing, resulting in a loss of jobs in a country where finding work is already difficult.  Many individuals were working extremely low pay factory jobs, and subjecting themselves to unsafe working conditions to support their families in the only method available.  Now even that little bit of money is being removed.

Despite the fact that there is less money available, housing inflation continues to occur at a rapid rate.  Right now, a downtown apartment in Shanghai costs $6,845 (cad) per square meter, while the average annual salary is $9,700 (cad).  This is yet another reason for individuals to hold onto money and feel reluctant to spend on goods. 

Because China has such a large influence on other countries purely because of its size, when information was released about the decline of the economy, the value of almost all Asian, and many American stocks decreased immediately.  This is because almost all countries, especially those in the immediate surroundings, depend heavily on exports from China to fuel their own economy.  Since China’s economic growth rate began to slow, New Zealand’s GDP has dropped 1%.  New Zealand is a large exporter of meat and dairy products to China, but with Chinese families trying to save money, many are limiting their purchases of meat and dairy and sticking to a more traditional and cost-effective grains-based diet.  This is an example of how an entire country can be affected by a shift in China’s economy, but more common than that, is the suffering of international businesses.  A slow growth rate will force some companies based in China to move elsewhere, where they have a greater chance of being able to expand at a lower cost.  Moving locations is an expensive process for the companies, and their absence would hurt China further. 

The Chinese government has created a five year plan, which is intended to be put in place through 2011-2016.  The primary goal of the plan is to restructure the economy by slightly slowing economic growth, increasing domestic consumption, and promoting new industries.  The economic growth has been slowed, but to a much greater degree than anticipated, and to the point where it is actually hurting the country more than helping it.  As a result, domestic consumption has slowed down, as families and individuals have less money to spend.  One of the new industries being promoted was green energy, and as stated before, that has not had quite the positive effect it was supposed to. 

The economy is currently centered on producing goods and selling them to other countries.  As such, when other countries experience a recession or decide to move production to another country, China suffers greatly.  To avoid this, the economic system needs to be restructured to be more domestically focused.  By selling locally manufactured goods to its own citizens, the impact of other countries’ economies would be much less, and there would be more money circulating within the country.  The problem with this plan is that it would take a long to implement.  So many Chinese people are living below the poverty line and would not be willing to spend their money on goods, especially when they need to save for healthcare, pensions, and housing, which the government does not provide. 

It does not seem that there is an immediate solution to regain the growth of China’s economy, but with changes to production, consumption, and target markets, long term changes are possible. 

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