China’s Economic Slowdown: Causes, Effects, and Interventions

China’s Economic Slowdown: Causes, Effects, and Interventions

China is the second largest economy in the world after the United States of America. Its exponential rise to prominence has made the communist country a formidable force in the global economy. However, it seems that the growth of the economy has reached its zenith and is now facing a downhill slope. The pace of growth is the slowest it has been for the Chinese economy for the past 18 months.

The Chinese authorities have acknowledged the fact that the country experienced a “slowing down” of economy for the 2nd and 3rd quarter of this year. The primary culprit is a housing/property construction slump. Reports reveal that hundreds of apartment towers in Chinese cities stand empty. Another parameter that contributed to the situation is the 2.3 per cent rise in inflation rate during the first quarter of the year.

It seems that a 27% plunge from the previous year’s statistics, coupled with a drop in new home sales was too much for the Chinese economy to handle. What complicates matters is the fact that the property market is not something that the government has full control over. Banking and investment holdings are difficult for economist to put their finger on due to “shadow banking”. Thankfully, the slowing down of Chinese economy won’t stall global trade as much of the weakness in the Chinese market has been built into valuations. Despite the valuation adjustments, the Chinese government appears determined to keep growth at a 7% clip. 7% GDP growth is the percentage of growth needed for Chinese economy to generate jobs for those leaving the western regions and entering into the urban work force. While a 7% growth might seem substantial in the US (projected growth is 2-4% for 2014) the Chinese government have lived with a necessity of having a economic engine that can absorb citizens looking for work.

The government of China has already started implementing measures to address this decline in growth. Here are some of the tactics that’s been determined by government officials as viable methods of boosting this Asian giant’s economic growth to previous levels: 1) planned railway investment, 2) tax reductions, but only for small and medium-sized businesses, 3) opening capital markets in partnership with Hong Kong. There has already been promising results and the government is expected to devise additional strategies to address the economic slump. For instance, a major stimulus is not expected but the value of Chinese currency looks to decrease compared to the US which will improve, yet again, the export revenue. The Chinese also explained that the slowing of pace is an expected consequence of the reforms being implemented throughout the country. These reforms are badly needed and hold much value in the long run. If anything we are looking at a maturation process of the second largest economy in the world.