What China’s Slowdown Means for the World
29th Nov 2023
At the beginning of 2023, the outlook for the Chinese economy was positive. With the zero-covid policy abandoned, tourists and domestic consumers had free reign to push the economy back to pre-covid levels.
However, in October of this year, China exported 6.4% less compared to the same period last year, according to the nation’s customs agency. Suffice to say, the rebound has been weaker than expected.
Over the course of the year, the world’s second-largest economy has been seeing slower growth than usual, coupled with high youth unemployment and a property market that accounts for up to a quarter of the nation’s output in chaos. And this will not just affect its vast population of more than 1.4 billion people; what happens to the economic powerhouse affects the rest of the world too.
The east Asian nation is responsible for a massive 40% of global growth, and so its deceleration will be felt across the planet. With its citizens, who account for almost a fifth of the world’s population, buying fewer goods and services in order to save, the drop in demand will be significant for producers, both domestic and foreign. The likes of Apple, Volkswagen, and Burberry, to name a few, who generate a large portion of their revenue from the huge Chinese consumer market, will all feel the pain, as will the suppliers and employees who rely on them. In 2021, for example, the 200 biggest American, European, and Japanese multinational corporations made 13% of their sales in China, raking in US$700 billion.
Such a large country is bound to be a large importer, despite its immense trade surplus. China consumes a fifth of the world’s oil, half of all refined copper, nickel and zinc, and more than 60% of all iron ore. With the Chinese property market collapsing and economy under strain, the country will be requiring fewer such supplies for construction and infrastructure.
This will come as a blow to commodity exporters such as Zambia, where shipments of copper and other metals account for 20% of the country’s GDP. Australia, a large supplier of iron and coal, is already taking a hit. In August, Mike Henry, CEO of BHP, the world’s biggest mining company, reported the lowest annual profit in three years for the Australian firm. According to Henry, China’s economic stimuli have been insufficient and ineffective.
There could also be longer-term consequences for China’s emerging dependants. We have already seen the world’s largest bilateral creditor cut back on projects abroad so it can focus on problems at home. With less cash, China could become even more isolationist, reducing its extensive overseas investments and loans to an even greater extent.
Closer to home, Germany has been heavily affected by China’s flagging demand, so much so that its economy has either contracted or stagnated in the past three quarters.
However, the crisis overspill should remain somewhat isolated. While Germany exports 4% of its goods and services, a somewhat sizeable portion, to China, the US, UK, France, and Spain only export 1-2% of their national outputs, for example. For most of the Western world, there would have to be full-blown economic collapse in China for there to be a significant blow to countries’ economies.
However, despite the US credit rating agency, Fitch, demoting its global growth forecast due to the Chinese slowdown, there could be a glimmer of hope. The world’s largest economy, the US, is experiencing unprecedented growth, with an annual rate increase of 4.9% in the third quarter of 2023. As a result, in July, the IMF raised its forecast for global growth from its previous projections in April.
There could also be relief for individual consumers based outside of the struggling superpower. With a large swathe of the world’s population demanding less, prices and import costs will be driven down. This should make the jobs of the central banks easier. The world is seeing some of the highest interest rates in decades, and this could curb inflation without further hikes.
And the West could see further benefits. According to a 2018 Bank of England study, should China’s growth become negative, global asset prices would fall and western currencies rise as investors hurry toward safer assets.
But what would this slowdown do for diplomacy? Could China look to fix marred relations with the US, whose trade restrictions have caused Chinese exports to the US to drop by a quarter in H1 2023? President Biden even argues that the east Asian nation may be forced to soften its aggressive stance on Taiwan. ‘China probably doesn’t have the same capacity as it had before’, Mr Biden said.
While this is all speculative, what happens to the rest of the world depends on President Xi’s reaction. But what about the country’s own future? Only time will tell.