Reasons behind the slowdown of the Chinese economy

By Ankita Agarwal & Guest on April 5, 2016

China is an export-oriented economy, largely dependent on the developed world for the supply of its domestic production (KPMG, 2015). The Chinese economy has long been promoted as a manufacturing hub offering cheap labor and other manufacturing facilities to its wealthy trade partners. Hence any decline in demand by its clients would have a straight impact on China. Data from the World Bank reveals a continuous decline in China’s percentage of exports and contribution of manufacturing in its Gross Domestic Product (GDP). In 2011, the contribution of Chinese exports to its GDP stood at 25.5% while in the same year the share of manufacturing to GDP was 40% (The World Bank, 2016b). The figures fell to 22.6% and 36% respectively in 2014. These figures and the claims made in one of the reports that the export orders contracted for the 15th straight month in December 2015 (Reuters, 2016) leave no doubt that a decline in global demand has influenced the Chinese economy.

Dependency on government-led infrastructure investment

The Chinese government has been irresponsibly investing in infrastructural development since decades to foster its growth indicators. Unlike most consumer-driven economies today, China is still a highly state controlled investment led economy. The Chinese government has supported an infrastructure development scenario where there is an immense oversupply of manufacturing, construction and real estate infrastructure, hardly indicating any real growth in demand (Marans, 2015). This overinvestment in infrastructure and real estate can be estimated by the fact that almost one in five homes in the cities are empty totaling around 49 million vacant units, while 3.5 million homes remain unsold (Vague, 2015). Consumer driven economies grow by consumer spending but Chinese consumers prefer to save rather spend (Keely, 2015). Hence it is the government funds which are ultimately into circulation and that too in a thoughtless manner.

One child policy

The Chinese government had introduced “one child policy” way back in 1979 to slow down the population growth but probably without analyzing its long-term repercussions. Although it helped to prevent around 400 million births (Anonymous, 2015a) but it also has resulted in an ageing population. Around 30% of the Chinese population is above 50 years of age (Anonymous, 2015a). This has not only created a dearth of the working population but now when the policy has been discontinued (Phillips, 2015) it is causing population imbalance where every earning member needs to support more dependents; both children and elderly.

Lack of home grown manpower talent

As described earlier, China is highly dependant on its exports. As the government plans to transition to a domestic consumption based economy, it probably forgets to consider that the country not only lacks working manpower but the available workforce is not apt for domestic manufacturing. China’s amidst swift urbanization and its limited skilled and educated workforce demands higher wages and better working conditions. In a survey conducted by Randstad World of Work research during 2013-14 they had reported that around 62% of Chinese employees were ready to resign from their current jobs if their demands are not met (Anonymous, 2014).

Ineffective labor laws

For an economy to flourish it is crucial that its manpower actively participates in the economic development. The All-China Federation of Trade Unions (ACFTU) is China’s sole official union forbidding Chinese labor to join trade unions of their choice (Anonymous, 2015b). Moreover, the labor laws in China lack international standards such as collective bargaining and right to strike. Discrimination based on gender as well as ethnic background can be easily spotted in China (Brown, 2012). These factors result in labor unrest over time.

Decline in the demand for steel was a big blow to the Chinese economy

The steel industry of China is estimated to be 822.7 million tonnes in 2014 (World Steel Association, 2015). The Chinese government has been encouraging investment in steel to boost its economic growth. The surplus of the industry has been estimated at around 300 million tonnes in China (Bloomberg News, 2015). The current decline in automobile and construction sectors has left these sectors struggling with declining demand, overcapacity and tight credit (Reuters, 2015). Today Chinese steel has reached to such a desperate stage where they are exporting steel even below their marginal cost resulting in a loss of $50 per tonne (John, 2015).