Economicanalysis of the slowdown of the Chinese economy

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Economic analysis of the slowdownof the Chinese economy

The recent slumpin the economy of China over the past couple of years has been theresult of a number of factors over the years.Whereas the reasons for the decline of economic performance in Chinaspan a couple of disciplines and fields, the economic and financialrelated reasons are the focus of this paper.The paper looks into the various economic factors that have led tothe slowing of the economy in China, as well as subsequent efforts bythe Chinese government in stabilization and acceleration of theeconomy. In addition,the paper reviews various measures the government has deployed in anattempt to reverse the slowing economy, as well as theireffectiveness.

Factors contributing to the slowdown of theChinese economyDecline in manufacturing

Following theglobal financial crisis and consequent recession in the 2008 – 2009period, most countries cut down on spending.Given that China’s GDP is largely dependent on the export ofmanufactured goods, the country faced a slump in the flow of income.The major reason behind this is the reduced spending by the majortrading partners to China – the EU, South Korea, and Japan.This led to the immediate impact of reduced demand that lead to anincrease in the level of inventory held by the Chinese manufacturers.Research has shown a link between income growth, in terms of GDP inthis case, and global trade slowdown – which is a factor to therecent slowdown in China [ CITATION Con15 l 1033 ].

A slump in the real estate sector

In line with therest of the world, and especially the developed markets, the housingmarkets in China has suffered a plunge owing to the falling prices ofhouses, and the reasons behind this are numerous.However, since the real estate sector and its allied sectors are,historically, responsible for about a third of the Chinese GDP, thedeflation of these markets is having a negative impact on China’seconomy. The impact,however, is not only limited to the direct investors of the realestate sector. Thebanking sector, for example, is also affected by defaulters of moniesborrowed for developments in housing.The slump in the real estate sector, therefore, affects multipleareas of the economy, thereby causing a slow rate of growth.

Challenges in Steel production

China is rankedamong the largest producers of steel in the world.The country has continued to enjoy such leadership for a long time,and the segment in the manufacturing sector has been instrumental inthe economy of China.However, over the past few years, the production of steel has beenimpaired by the downfall of the largest purchasers of the steelproducts. Among theseis the automobile sector.Owing to vigorous competition from other countries that haveeventually overtaken China, the automobile sector in the country hasbeen dwindling. ASsuch, the quantity of steel purchased has declined.Another industry that is a purchaser of steel is the constructionsector. Theconstruction and allied segment has been suffering similar issues todo with slowed business in the country as well as the region –largely attributed to increasing competition.The decline of these sectors has led to the weakening of the economyof China, since steel manufacturing offers a great portion of thecumulative inflow of cash into the economy.

Bad debt in China’s books

Following the 2008to 2009 financial crisis, China took on a huge amount of debt as ameasure to aid its industries and by extension the economy stayafloat. These moniesenabled the country to surge through the troublesome times withrelative ease in comparison to its competition and regionalcounterparts. In spiteof the help the funds had during the tough times, China’s debtbooks had increased by over 100% in about two years.This offset the country’s balance of payments by a large margin,which increased the stress levels of the nation [CITATION Irv14 p &quot488 – 489&quot l 1033 ].In retrospect, since the economy was not performing optimally, ittook a toll on the economy as the country struggled to repay theburdensome loans. Inaddition, majority of the borrowed funds had been funneled into theconstruction and real estate sectors.Considering both of these sectors have been slow in the past fewyears, the repayment schedule expected put much more stress on theeconomy. This is as aresult of increasing inventory of manufactured goods, and theincreasing number of unsold and unoccupied real estate developmentsin the state.

Government efforts in stabilizing andaccelerating economic activity in ChinaManufacturing incentives.

Following theglobal economic downturn, the government of China tried to revampeconomic performance by providing incentives for manufacturers.This was a good call as most of them had suffered immense losses andsluggish production due to the piling quantities of inventory thatwas not moving. Somemanufacturers sold their inventory and assets and closed shop.To stop this, the government introduced various incentives to reducethe costs of business for them these include reduction in taxation,availing funds at a lower rate of interest, encouraging investorconfidence and an approach to globalization in business operations [ CITATION Ben13 l 1033 ].

Boosting of domestic markets.

Since 2012, theChinese government has had an incentive of increasing sales of thecountry’s produce to the locals.Given that the country is among the most populous globally, the localmarket is quite substantial.As such, an increase in the uptake of products by this market wouldlead to better performance of the economy rather than depending onexterior markets that depend on exports.The measure has observed an increase of up to 14.8%annual growth of retail sales by the Chinese enterprises in thesubsequent years [ CITATION Nat13 l 1033 ].In addition, the measure has resulted in the increase of exports andimports by 4.3% and7.9% respectively.

Measures the Chinese government has used toreverse economic slowdownImplementation of aggressive fiscal and monetarypolicies

Following theglobal slowdown in manufacturing in 2009, many manufacturers in Chinatook measures to protect themselves from suffering immense losses.Many of them took to reducing their level of production anddrastically reducing the level of inventory they held to a bareminimum. In spite ofthe move being meant to protect the individual investors, it ended uphurting the economy at a macro level.This largely occurred in terms of rapid deceleration of the rate ofproduction of the country [CITATION Pet10 l 1033 ].In the following months, the Chinese government implemented variouseconomic policies that Huang terms as unusual.Among these policies include the investment plans stimulus policy of2009, and monetary policy expansion of RMB 7.4trillion [CITATION Pet10 p 51 l 1033 ].

Policy Relaxation

Once the countryhad made some progress from the initially implemented monetary andfiscal policies, the Chinese government saw it fit to relax some ofthe policies. This move was meant to enable market oriented forces totake over and control the economy back to equilibrium. These includeddecreased supervision and vigilance on the interest rates, andloosening lending restrictions [CITATION Int12 p &quot63 – 65&quot l 1033 ].

The effectiveness of such employed measuresMonetary and fiscal policies

The implementedmonetary and fiscal policies by the Chinese government are observedto have had a positive impact on the economy, owing to an increase ofup to 13.8% broad moneygrowth. In addition,the narrow money balances increased by 6.5%,while the money in circulation increased by 7.7%.According to the Chinese bureau of Statistics, this growth led tobroad money balances of up to 97.42trillion Yuan, narrow money balances of 30.7trillion Yuan, and cash in circulation of 5.47trillion Yuan [ CITATION Nat13 l 1033 ].

Policy Relaxation

The relaxation of the formerly stringent policies by the Chinesegovernment resulted in the strengthening of the banking system, andan increase in the capital inflow to the economy, which has resultedin increasing economic growth.


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