China downturn exposes its economy’s ‘fundamental weaknesses’ and may affect the world, say experts
China‘s economic downturn is a “worrying” sign that exposes “fundamental weaknesses” in the country’s economy and is likely to affect the global economy, experts say.
The country is experiencing a protracted slump where growth is stalling, and last week the Chinese yuan fell to its lowest levels in 16 years.
Dr Jan Knoerich, senior lecturer in the economy of China at King’s College London, said the downturn exposed “fundamental weaknesses” in the country’s economy.
The country is going through a crisis in its property sector, which sector accounts for a quarter of the economy, and it has long been dependent on the property market booming.
But now major housing development companies are failing and house prices are falling.
“What the Chinese Government would normally do is it would prop up the economy – it would start building, constructing and putting money into the economy, and it’s done that for decades now,” Dr Knoerich said.
“But what’s different this time is that it seems the Government is starting to worry that it cannot do that any more, simply because it has done it too often and has accumulated too much debt. If it cannot do this, it will have to accept lower economic growth rates, which will put dampener on confidence in the economy.”
Other problems include a high youth unemployment rate, which was a record high of 21 per cent in June and which the Government decided to stop publicising earlier this month, amid suggestions that it was an indication of the country’s slowdown.
On Tuesday the US criticised China for reducing the transparency of its reporting on basic economic data in recent month.
Jake Sullivan, the White House national security adviser, said: “These are not, in our view, responsible steps. For global confidence, predictability and the capacity of the rest of the world to make sound economic decisions, it’s important for China to maintain a level of transparency in the publication of its data.”
Other issues include a change in the labour market from majority high-skilled to low-skilled jobs, an ageing population, and a struggle to shift to a consumption-based economy.
Financial instability at the world’s second largest economy is likely to have global implications, Dr Knoerich said.
“It’s never good when China’s economy doesn’t do well because it’s going to spill into the rest of the world.”
The economist and author George Magnus, a research associate at Oxford and SOAS universities, agreed, saying the slowdown was “worrying” though the direct affect on UK businesses and consumers was currently “mild”.
He said if the yuan continued to weaken, the prices of Chinese goods sold in the UK could be cheaper, but Chinese imports could also continue to weaken, affecting trade between the two countries.
Mr Magnus said China’s economic and political power could shift in decades to come if its growth continued to slow.
“We probably have to come to terms with the idea that China in the 2020s and the 2030s will not be the China that we have become accustomed to in the past 30 or 40 years, and that its economic trajectory is much more damaged than the one that we have come to know.”
He said the country would continue to be “a huge manufacturing country” but that dependence on it would likely diminish as other areas – such as India, Malaysia, Korea and Mexico – grew.
Forty years ago many people thought Japan would remain a global economic superpower, Mr Magnus said, due to its presence of big brands such as Sony, Hitachi and Toshima, but it ran into a “brick wall” when it could not diversify the economy.
Something “not dissimilar” could happen to China, he suggested.
“China could [continue to] be very accomplished in science, engineering, electric vehicles and quantum computing – all the things Xi Jinping wants China to be good at, but it’s also true that their economy and economic development model is not fit for purpose right now.”
