China’s economy has always been its greatest asset. The Asian manufacturing giant proved to be a tough competition to western powers like the UK and the US, with its meteoric economic growth. However, when the unprecedented covid outbreak happened in late 2019, the once ten pointer GDP suddenly started losing its sturdy and secure position.
As the country entered a complete lockdown, a series of economic problems started coming to light. Disruptions in the aggregate demand structure reemerged, with households increasing savings, government support undermining investments, and external imbalances widening. While China recovered quickly due to successfully starting to contain the virus in March 2020, the above-mentioned problems were yet to show their effect.
The first blow came in June 2020, when China’s economic growth dropped to 7.9%. While this drop was not severe, as the nation still emerged as the only key market to achieve positive growth, it was the second blow that became a big concern for not just the Chinese administration but also the world. The second blow cost the Chinese economy a significant 18.3% of its growth and further softened the expected growth rate. This sudden and sooner than expected dip raised various concerns about the future of all the economies of those nations which are yet to contain the virus successfully. This article aims to explain why China’s softening growth is a cause of major concern to the world.
REASONS WHY CHINA’S SOFTENING GROWTH IS OF MAJOR CONCERN
The 3rd G20 Finance Ministers and Central Bank Governors meeting, which took place in Venice this year, warned that due to reasons like unequal vaccinations and tampered number of cases, there was a threat to global economic recovery. This warning was issued just in time for the Chinese economic growth rate to start slowing down. The slow descent of such a key player in the global market, which holds the power to shake a significant share of the world economy and a mass number of economies, is a cause of concern for many.
China has always been known for its industrial peddle. It is a solid deduction that a dip in the growth rate of an economic giant which built its prosperity on the back of a robust manufacturing market will surely hit the demand for industrial and capital commodities the hardest, causing worldwide pressure to disinflation. This will cause industrial inflation to peak at uncontrollable levels and will significantly decrease the prices of commodities. In such a scenario, where the world is deep into substantial economic problems created by the pandemic, rising inflation will only create more burden for the already struggling economies. And history is a loyal witness to many prosperous economies losing their wealth to uncontrollable inflation.
Another cause of concern stems from the fact that the country achieved its miraculous growth even during a pandemic. While, in hindsight, this might seem like a significant rebound, in reality, it is a primary factor for risk, especially when it comes to the world economy and the stock market. After months of tentpole accomplishments and unbridled optimism, the sudden shifts in the economy are being viewed by many as a period of inflexion in the markets.
While there is a 50-50 chance that the shifts may have an adverse impact, they cannot be declared a sure possibility. It is a marked interpretation that the outcome majorly depends on how well the other recovering economies can handle themselves during their post covid efforts. This is an area of thin ice that the economies have to tread on to assure their financial security remains unthreatened. The concern with the Chinese economy’s sudden descent is not that the world economy and nations, in particular, will further descend. Instead, it is that any one of the risks may stifle growth too soon, perhaps derailing the rebound from the pandemic crisis and slashing corporate earnings.
While all the above-mentioned causes warrant deductions that concern the world economies, this one affects the change of power dynamic in world trade, a factor that directly influences the world economy. The United States of America has been leading the receiving end of this stick. It is no secret that the US-China trade war and supply chain disorder have contributed to the "decouplement" of the two influential economies. Companies located in the US are now seeking other manufacturing hubs instead of trading goods from China. Many other countries like India have also followed suit and banned many products of the Chinese markets, most significantly, TikTok, the Chinese video app.
As mentioned before, China is a country that built itself up on the back of the manufacturing and exporting market. China is the world's largest exporter, with an industry that accounts for approximately 2,591.12 Billion US Dollars as of 2020. With some of its big clients pulling out of the deals, Chinese growth is set to decrease. Just the USA pulling out of the exports has caused China about 15% of their trade and exports. China’s position as a crucial player in the world economy was in a way cemented by its position as the leading exporter of the world. The sudden shift in power dynamics in terms of an influential industry like trade can completely alter the course of the World Economy. Ceteris Paribus, if it were not for the ongoing pandemic, the prevailing opportunity would have allowed other countries to explore their potential as exporters and manufacturers. But for now, such a development seems impossible.
Amid a global pandemic, every economy is struggling - some less, some more, nonetheless, they are struggling. While China’s achieving positive growth is an important task, it is not an easy one. China, one of the first major Asian economies to break into the international sphere and establish itself as a dominant player in the world economy, plays an influential role in this scenario.
This shift in the Chinese economy is a warning bell for many recovering nations to review their policies to avoid such a situation. From the scenario presented, it is pretty clear that the miraculous rebound of China was still not enough to evade the sudden slug.
This surge should be taken very seriously as it can destroy centuries of progress. It is imperative to realize just how big an impact one wrong move can have on its economic well-being. The difficulties pointed out in this article need to be considered during the post-COVID recovery of many nations, together with implementing short-term macroeconomic policies and structural changes to boost growth to a more balanced level. China's slowing growth is either a lesson for other recovering and developing economies or an eerie testament to their subsequent descent.
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Written By: Shubhi Pandey (email@example.com)
Edited By: Priyanshi Kapoor