China, the world’s second-largest economy, is facing a slowdown in its growth as it grapples with multiple challenges, both domestic and external. The slowdown has implications not only for China itself, but also for the global economy and trade.
What are the causes of China’s economic slowdown?
There are several factors that have contributed to China’s economic slowdown, some of which are intentional and some of which are unexpected.
- One of the intentional factors is China’s shift from a high-speed, export-led, investment-driven growth model to a more balanced, consumption-led, innovation-driven growth model. This shift is part of China’s long-term strategy to achieve higher-quality and more sustainable development, as well as to address some of the structural imbalances and environmental issues that have accumulated over the years. However, this transition also entails some short-term costs, such as lower growth rates, higher unemployment, and lower profitability for some sectors1.
- Another intentional factor is China’s crackdown on some of the industries that have been seen as posing risks to financial stability, social stability, or national security. For example, China has tightened regulations on the property sector, which accounts for about a quarter of the economy, to curb excessive leverage and speculation. China has also imposed restrictions on the technology sector, which has been a major driver of innovation and growth, to address issues such as data security, antitrust, and social responsibility2.
- One of the unexpected factors is the Covid-19 pandemic, which has disrupted China’s economic activity and trade. China was the first country to be hit by the virus and the first to impose strict lockdowns and travel bans to contain it. Although China managed to largely control the outbreak and resume production earlier than other countries, it has also adopted a zero-Covid strategy that requires stringent measures to prevent any resurgence of cases. This strategy has resulted in frequent lockdowns, mass testing, and quarantine in several cities, affecting both supply and demand1.
- Another unexpected factor is the power shortage that has affected many provinces in China since September. The power shortage has been caused by a combination of factors, such as surging coal prices, reduced coal output due to flooding and environmental policies, increased electricity demand due to industrial recovery and hot weather, and insufficient power grid capacity. The power shortage has forced many factories to cut production or shut down temporarily, affecting industries such as steel, aluminium, cement, and textiles2.
What are the consequences of China’s economic slowdown?
China’s economic slowdown has significant implications for both China itself and the rest of the world.
- For China itself, the economic slowdown poses challenges for maintaining social stability, employment, income growth, and poverty alleviation. It also puts pressure on the fiscal and monetary policies of the government and the central bank to provide adequate support for the economy without causing inflation or financial risks. Moreover, it may affect China’s geopolitical ambitions and influence in the region and beyond3.
- For the rest of the world, the economic slowdown in China means less demand for its exports, especially commodities and intermediate goods. It also means less investment from China in other countries’ infrastructure and development projects. Furthermore, it may increase global uncertainty and volatility in financial markets and exchange rates. Additionally, it may exacerbate trade tensions and competition between China and other major economies such as the US3.