China’s economy is slowing. After decades of double-digit expansion, the country’s GDP is now growing at around 6 percent — the fastest of any major economy but still the lowest level for China in three decades. Several factors — some structural, some political — contribute to the deceleration. But regardless of their origin, China’s troubles are not its alone. Their impact is already being felt throughout the region.
As any economy develops, its growth rate slows. Once-abundant resources (labor prime among them) become scarcer, comparative advantages erode and rent seekers establish footholds. China is no exception. It was inevitable that the explosive growth of the first two decades of reform would moderate as the country’s red-hot coastal provinces developed and input prices soared. The only question was how the country would adjust to the slowdown and whether the government could temper expectations and maintain social order. That answer has assumed greater importance in recent months.
The most recent figures reveal China’s growth has slowed to 6 percent, the lowest level in nearly 30 years. That is within the bounds of official estimates, but weakness is evident throughout the economy. Industrial output increased 4.7 percent compared with the previous October, but that is 0.7 percentage point below expectations and 1.1 percentage points below September’s performance. Factory activity shrank for the sixth consecutive month, new export orders decreased for the 17th consecutive month and the value of delivered industrial exports shrank 3.8 percent, the third straight month of decline.
Especially worrisome for Chinese decision-makers is weakness in the domestic market. Corporate and household financing reached 618.9 billion yuan ($88.2 billion) in October, the lowest level in more than three years. Growth in the services sector continues to slow, and retail sales expanded 7.2 percent, the same level as a 16-year low hit in April. Analysts are especially alarmed by slumping auto sales, typically considered a bellwether of domestic performance. Retail car sales, which have been marked by double-digit growth, fell 6.6 percent in September from the previous year.
The slowdown is being felt beyond China’s borders. The International Monetary Fund estimates that China is responsible for 39 percent of global growth, a function of its size and its insatiable appetite for goods and services. China is the leading importer of products from 34 countries; it is in the top three for about 70 in total. In its most recent assessment, issued last month, the IMF reduced its forecast for growth in Asia to 5 percent this year and 5.1 percent in 2020 — reductions of 0.4 and 0.3 percentage points, respectively, from April projections — as a result of China’s woes. It concluded that “escalation of trade tensions could weaken external demand and depress confidence and investment. … [and] lead to a pronounced economic slowdown with significant regional spillovers through close intra-regional linkages.”
Japan is feeling the pain. Exports have fallen since December, shrinking by more than 5 percent in September alone, much of that plunge the result of shrinking demand from China. As a result, Japanese corporate earnings reports have been worse than anticipated.
Chinese policymakers have two other economic concerns. The first is inflation. The consumer price index increased 3.8 percent in October, driven by skyrocketing pork prices, which rose 101.3 percent. China’s pork farmers are being ravaged by African swine flu. The government says the herd has been reduced by 41 percent, or almost 200 million pigs, which will cut output by 25 percent. Rising prices have spread to chicken and beef. Rising prices at the same time of economic slowdown is an invitation to unrest.
A second danger is the financial sector. An economic downturn will punish small companies and the financial institutions that have been lending to them. Analysts are increasingly concerned that those banks will not have sufficient reserves if those companies default.
A downturn could trigger instability in a society that has only known expanding economic opportunities. It is not clear how the Chinese people will react to diminished prospects. China’s neighbors must be ready if the Beijing government decides that it needs to distract its unhappy public.
Another factor must also be considered: the prospect that U.S. President Donald Trump will see these troubles as a source of leverage in his trade fight with China. Trump believes he can win a trade war and that the current conflict is hurting China worse than it is the United States. He insists that he will raise tariffs “very substantially” if no deal is forthcoming. That is precisely the sort of bluster that the president likes but which could, if applied, prove far more destabilizing than he imagines.