Photo courtesy of Japanexperterna.se via Flickr.
Over the course of the past few months, China’s economy has plunged steadily into contraction, a period of negative growth.
The World Bank predicts that China’s gross domestic product (GDP) will continue to drop, pushing it below 7 percent within the next two years, far below where the country stood at 10.4 percent just four years ago, and the slowest rate it’s seen in over two decades.
As of September, China’s manufacturing purchasing managers’ index (PMI) dropped alarmingly to 49.7, and a private survey estimates this figure may be even lower.
These numbers mean that the country with the second largest economy is in decline, or in poor economic health. If this is the case, what does it mean for China and for the rest of the world?
In order to understand, here are three key points to consider:
1. Reasons for the contraction are opaque
While it’s clear that China’s GDP is falling, the reasons behind the slowdown are far less agreed-upon than the numbers. Multiple interpretations of the data have emerged, and analysts are distrustful of China’s official growth figures.
Ultimately, China is now looking at slowed growth in labor, capital, and productivity, due in part to both temporary and long-term forces, which include:
- Shutdown of coal-fired plants to reduce pollution
- Closing of factories to clear skies for military parade
- Explosions in port city Tianjin
- Bursting of the stock-market bubble
- Enormous total debt burden (over 200 percent of GDP)
2. There will be ripple effects across global markets
In 2014, China was ranked the largest global export partner, with 43 countries claiming it their top market.
If China’s economy slows, it will not be an isolated occurrence. A slower economy means China will import less materials and products from other countries, which may include:
- Oil, gas, and metals from Africa and South America
- Mined ores from Australia
- Agricultural produce from Brazil and New Zealand.
- Luxury products (like cars and machinery) from Europe and the United States
3. International officials seek increased transparency
China’s president Xi Jinping has discussed transitioning the country’s economy into one reliant on household consumption, shifting it away from exports. Critics argue that, if done improperly, this shift could worsen the decline.
G-20 officials have shown concern regarding Beijing’s market instability and how it’s being handled. Citing a lack of transparency as a key problem, economists warn that low political support could delay the economic overhaul, and if China is unable to stabilize its economy, it may pull the global growth rate down with it.