Lately we have been hearing various news of the great slowdown of the Chinese economic engine. Every media outlet I have been following is touting the impending doom of the Chinese Economy. Is there any truth to a Chinese economic Slowdown and if so how the economies around the world would could react is the question of the day.
Let’s first look at the data coming out of PRC. Beijing recently made public that the Chinese economy expanded yet again with an impressive 6.7% growth on the third quarter matching previous predictions. The growth is also very persistent with its last two quarters. However, skeptics are looking beyond the numbers. This year the growth is relatively slower compared to last year, which was the slowest growth in the last 25 years. If that trend continues, what are the ramifications for both China and the rest of the world?
One interesting statistic that came out recently states that the According to the Bank for International Settlements, the gap between China’s outstanding credit and its long-term economic growth is now wider than it has ever been. This is a very interesting statistic for it could lead to a recession USA had to go through in 2008. It is true, China had come close to a recession in 2008 but the Keynesian fiscal policies did stop the downward spiral. Today the debt is too large to be solved by a spending increase, but China can strictly control over its banking system and avoid another crisis.
IMF, the International monetary fund has recently released a report indicating that it is cutting its growth predictions for 2017. According to IMF the global growth will hover around 3.2 % next year. At the same time around WTO released its own prediction reducing its trade prediction more than a third last month.
Global trade as a threat
Unfortunately, the recent rhetoric has been quite negative about the free trade. A significant portion of the election rhetoric in America these days is revolving around protectionism. Free trade used to be as popular as football for the lower prices it produced for many goods, and the competition that stimulated American industry to greater quality and efficiency. However, today, many Americans view trade as a corrupt system that rewards countries that produce the cheapest products, by paying the lowest factory wages.
From the perspective of the USA and others developed countries a slower Chinese growth means less demand for the products made in China and reduced commodity prices to trigger deflationary impulses. Exports to China of manufactured goods from the United States, Europe, and other developed economies can be expected to drop as well, leading to a slowdown in massive scale.