Key Implications of a Slowing China Economy – Introduction
China is the second largest economy in the world with a GDP of more than $12.2 trillion and a population of more than 1.3 billion people. The country’s growth has accelerated significantly in the past two decades. The reason for this is that China was brought into the World Trade Organization (WTO) by the Bill Clinton administration. The goal was to create order in the world economy, which would help usher a democratic regime in the country. It was also intended to bring order.
Years after the country came to the WTO, its economy has been booming. This is attributed to a number of factors. Fist, the country’s communist party does not need the democratic institutions to make changes. Whatever they want to do happens. For this reason, the country’s leadership is able to implement changes without the process that takes place in other countries.
Second, after the entry to the WTO, the country was able to attract global companies, who were attracted to its large population and young people. Companies like Apple and Nike, which used to manufacture in the United States then shifted to China, where they created thousands of jobs. These jobs, while paying a low price, helped create a stable country.
Third, the contrary to the core belief that bringing China to the table would help it abide by the global rules, the country did not do so. As a result, the country engaged in activities that were contrary to the global rules. For example, the country did not respect the intellectual property of global companies. For this reason, Chinese companies stole ideas and mass-produced them. For this reason, products of companies like Nike are produced in large scale by Chinese and sold to the emerging markets for pennies.
In the same situation, China mandated all western companies setting base in the country to form joint ventures with local companies. China argued that these ventures would help China become more prosperous. However, when the companies established JVs, the Chinese stole the intellectual property. It is this reason that companies like Facebook and Google have not achieved success in the country.
As the biggest supplier and consumer, China is without a doubt the most important country in the world. Therefore, when the country released the GDP numbers today, it was a confirmation that the country’s economy was slowing, a scenario that would have ramifications around the world. In the fourth quarter, the country’s GDP grew by 6.4%, which was lower than the third quarter growth of 6.5%. This was the lowest level since 2009. This was however in line with what the market was expecting. At the same time, the country’s industrial production data, an important figure followed closely by investors rose by a higher rate than expected. Last week, the country’s data showed that exports and imports had fallen sharply.
The current softening of the economy has been partly caused by the current trade conflict between the US and the country. The trade war has caused exports to the US be more expensive even as American companies search for alternative producers. Therefore, in the days to come, investors will watch closely at how China will react. Already, it has announced plans to ease taxes.