What slowing economic growth means for China

The great Chinese engine of growth has slowed further, but what does it really mean?

China’s economic growth forecasts have been cut to just seven per cent for 2015, and first quarter growth for this year was shown to slow to seven per cent, which was a six-year low. But while China’s economic activity remains much higher than those of most other countries, the slowdown is still thought to be a cause for concern by many analysts.

What’s the reason for this?

Part of it can be contributed to the fact that nobody saw it coming. A number of experts had predicted China’s growth rate to remain steady at above eight per cent for a number of years more.

Furthermore, there has been a notable slowdown and imbalance in labour, capital and productivity. The decrease in these three key areas has seen economic activity in China dwindle, and the sharper-than-expected slowdown could see the nation record its slowest annual expansion in over two decades.

The debt burden

Since the financial crisis, China has embarked on a borrowing binge to power its nation through the depths of economic turmoil.

Total debt (which includes government, household and corporate borrowing) swelled to 282 per cent of China’s total annual economic output by mid-2014, according to McKinsey. That’s 100 percentage points higher than levels seen in 2008 (150 per cent debt to GDP ratio) and equates to around $28 trillion of debt.

While the massive monetary stimulus may have propped up the national economy during the financial crisis, the economy still slowed by around 30 per cent over the last five years. China will now be finding its hands are tied by having to deal with huge repayments.

The shifting labour landscape

China’s job market looks fairly robust, as 13.2 million urban jobs were created last year, surpassing the official target of ten million. But this figure fails to tell the whole story.

Data shows that agriculture jobs have been declining for years, and China’s famous manufacturing industry is beginning to show signs of struggle. In fact, the labour market is largely being driven by the services sector, which is positively booming.

Around 300 million people work in services in China and account for 40 per cent of the workforce, according to a New York Times article, which further illustrates the extent to which the jobs market in China has become lopsided. It’s likely due to the number of graduates that are seeking out skilled work, as Chinese universities are producing double the number graduates than ten years ago.

Supply is outstripping demand and, according to official data, there are now 88 graduate-level jobs for every 100 job seekers with the right requirements.

With these conditions wage growth will likely slow and consumer spending could stall, which could further suppress economic growth in China.

The drag effect

China’s economy, the second-largest in the world, is slowing to the lowest rate seen in more than 20 years- this will have wider implications.

Global growth has already been around one percentage point slower than the International Monetary Fund predicted in 2010, due to a stagnating Eurozone economy, less healthy emerging markets and the Chinese cool down.

It’s part of the reason for the staggering decline witnessed in the price of oil and other commodities, while global trade has also been slashed, and these vulnerabilities remain.

If China’s growth is another whole percentage point lower than current expectations it could drag on the global economy even more, perhaps by as much as 0.5 percentage points, according to calculations by the World Bank. This could depress commodity prices lower and also for longer.

China’s slowdown is forcing the government to attempt to change their economic model, which carries certain risks. However, if managed correctly, this could result in a more robust economy that will ultimately be good for China and global growth.