China’s Economic Conundrum

By, Joshua Barzola

The media coverage this year has been increasingly focused around news on China, financially and politically. Many analysts are anxious over the recent “slow” growth of the Chinese economy. As the world economy continues to fluctuate, is China experiencing a slowdown in its robust economy?

Since the 1990’s, developed economies have envied the consistently high GDP annual growth rate of China. The GDP Annual Growth rate in China has averaged 9.3% from 1989-2019, transforming the country’s developing economy to an economic powerhouse. Canada saw its growth rate peak at 6.0% in the 2000’s, which in comparison, matches China’s lowest GDP growth rate since 1993. In contrast to the world economy, the international monetary fund (IMF) reported in July a global average of GDP growth in 2019 at 3.2%. If you were to compare this to China’s reportedly “low” growth rate of 6%, you can see the country is almost doubling the average economic growth of the world.

In light of all this data it begs the question, does China’s slower growth rate affect the other world economies? Does the smaller rate of growth hurt the robust Chinese economy? Through several key indicators, there are reasons to be concerned about the future health of the economy.

In terms of unemployment, rates seem to remain constant, however there are signs that the recent trade war with the US and lower domestic demand has triggered layoffs in the manufacturing sector, a key indicator of economic health in China. The Purchasing Managers’ Index (PMI) can help show economic trends in the manufacturing and service sectors. This gives investors insight from the perspective of purchasing managers whether market conditions are expanding or contracting. As per Reuters, an employment tracking component of the PMI suggests that firms are hiring fewer employees since last year July, showing signs of the industry contracting in China.

Another key performance indicator (KPI) in the country’s industrial sector is electricity generation. China has the largest electric power industry in the world. Its growth is essential to China, as the electric power industry accounts for almost a third of the country’s GDP. Through Reuters Eikon data, year to year percentage change has slowed down tremendously since April 2018. A major reduction in electric generation can be justified due to the trade war with the United States limiting the demand of supply chain facilities throughout the country.

As in any developing or developed country, consumer spending plays a vital role in the health of the economy. Higher average consumer spending stimulates the economy, creating higher growth rates. It is concerning to see that auto sales in China have declined over the past 15 months. Accounting for roughly 10% of total retail sales in China, the world’s largest auto market continues to struggle, which could worry investors about the Chinese consumer’s financial situation.

Ultimately, as China’s economic growth begins to slow down, this can cause other world economies to struggle. Being one of the largest exporters and importers of goods, several countries around the world rely on China’s demand for products and goods to help stimulate their own GDP.

As the trade war between the US and China continues, expect further downturn in economic growth. In the short term, aside from recent Sino-Canadian relations, the prolonged trade war could help boost the Canadian economy as China looks to find ways to produce and export their products elsewhere.

Featured image by Yiran Ding.

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