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China’s economic growth is sputtering. The official forecast of 6% to 6.5% is the slowest on record, and the 6.2% growth actually reported in the second quarter is the weakest since the government began releasing quarterly data in 1992. The most obvious and recent cause is the trade war with the U.S. The knock-on effects are global, affecting companies and consumers alike.
1. What explains all the worry?
China’s $14 trillion economy, second in size only to the U.S., accounts for almost a third of global growth each year. That makes it a vital driver of job creation and improved living standards everywhere. The advanced age of the U.S. expansion -- more than a decade -- and worries about Europe make China’s pace of continued growth that much more important. If China’s current slowdown were to suddenly accelerate, the ripple effects could squelch the global recovery. A slowdown is structural -- something that’s expected to happen over time. But a plunge defies expectations and is therefore far more disruptive.
2. What’s wrong with 6%?
In one respect, nothing, since it’s more than twice the global rate. But China’s economy is loaded up on debt and its ability to service repayments depends on rapid growth to generate the profits and tax revenues needed. Slower growth challenges China’s ability to stem the buildup of its government, corporate and household debt -- which according to Bloomberg Economics is on track to add up to more than 300% of gross domestic product by 2022. The bigger that debt pile becomes, the bigger the impact on global growth should it all go sour. Plus, growth is set to slow further and could even slip below 6% without more aggressive stimulus -- something officials in Beijing have been leery of trying for fear of sparking a financial blow-up.
3. How’s the slowdown being felt?
It has impacted everything from factory output to the jobs market. Deflation is looming after China’s producer price index slowed to zero in June from a year earlier, and then started falling. Slower consumer spending has hit multinational companies including Apple Inc (NASDAQ:AAPL). and Prada SpA. The trade war is hurting exports as U.S. tariffs bite and is causing imports not only from the U.S. to plunge, but also those from Japan and South Korea -- illustrating how the battle is reshaping global commerce. Bloomberg Economics estimated the cost to the global economy from uncertainty over trade could be $585 billion in 2021.
4. How bad could it get?
With no resolution in sight for the U.S.-China trade war, things will probably get worse before they get better. Business confidence and activity is looking shakier across the globe. Second-quarter GDP in export-reliant Singapore, a bellwether for global demand, shrank the most since 2012. Across Asia and Europe, factories are already feeling the brunt, while growth signals in the U.S. have been mixed. Meanwhile, rising tariffs have led companies to move some production out of China to countries such as Vietnam. As of mid-September, nine of the 10 gauges tracked by Bloomberg to assess the health of global trade were below their average midpoint, including three below their long-run normal ranges.
5. Why is China growth slowing?
Aside from the trade war, it’s because such a breakneck pace of growth can’t continue forever. As the population ages, there are fewer working-age adults to drive output. There are fewer easy investment opportunities, like building missing infrastructure. And the debt overhang means more activity has to go to paying back the spending of the past. Other drags are President Xi Jinping’s “critical battles” to reduce China’s massive debt pile and clean up toxic air pollution.
6. What’s China doing?
Trying to walk a fine line. The fire-hose stimulus that followed the global financial crisis kept China from a Great Recession like the U.S. suffered but swelled the debt mountain. Now it’s trying to do just enough to prevent a hard landing -- where the economy flat-lines or flirts with recession -- while avoiding another debt buildup. China’s central bank in September said it would inject another 900 billion yuan ($126 billion) into the economy by cutting the amounts banks have to hold in reserve, in a bid to stimulate lending. A fiscal stimulus plan including about two trillion yuan of tax cuts is slowly feeding through into the economy. The government has eased the rules for using government debt in some infrastructure projects and pledged to renovate hundreds of thousands of old buildings. The People’s Bank of China has also asked banks to not lower mortgage rates further, despite easier monetary conditions. It’s also boosted credit support for small firms, increased liquidity for smaller banks and asked big lenders to sustain funding to avert a squeeze. In June, the top economic planner unveiled a stimulus plan to help spur demand for automobiles and electronics.
- Bloomberg Opinion’s Hal Brands advises listening to the ‘China hands’ now; Adam Minter on China’s growing affection for used goods, and Christopher Balding sees China as dithering on the economy.
- QuickTakes on China’s interest rate shakeup, its new tech exchange, financial sector opening, equivocation about free markets and the trade war.
- Economists lose sleep over “nightmare” of deflation.
- Bloomberg Economics lowers its projections for China’s growth again.
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, James Mayger, Paul Geitner
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