Economists worry as Chinese growth rates decline

Beijing’s burden: A slowing China bodes ill for the world economy, Financial Times

Although still growing at rates other nations envy, the world’s fastest growing economy is starting to slow down. Economists predict that the Chinese economy could grow by as little as eight percent next year, as opposed to the double digit rates of years past. It is unclear yet whether China is facing real financial problems or is merely experiencing a positive step back from unsustainable growth rates.

However, there is growing worry that a variety of Chinese markets will begin to fall off. For example, while exports continue to increase, business with Europe—China’s main export market—is decreasing as European consumers are affected by the credit crisis. Economists are also worried about China’s property market, a driving force in the Chinese economy. Although growth rates vary substantially by city, many cities are reporting a decline in property prices, as well as in sales and floor area under construction. Production of building materials and mortgage approvals are also down. It is hoped that, because Chinese homebuyers must put down much larger deposits on homes than homebuyers in many developed nations, the property market will stabilize. If the property market does begin to collapse, however, it will have a direct negative effect on private sector investment and—in turn—on the rest of the Chinese economy. Should the Chinese economy experience a sharp decline, Middle Eastern and Latin American countries will be hit hard, as well, since they rely on China to buy up the commodities they are producing.

China is not sitting back idly, waiting for its economy to collapse, however. It recognized several years ago that double digit growth rates could not be sustained indefinitely and is looking for ways to introduce a large structural shift into its economy. Several options to further this plan include improving social security so that workers feel more confident about their savings and willing to spend more money, and loosening its restrictions on credit. It has already reduced interest rates and reserve requirements for small banks.

Questions

(1) Is China’s economy experiencing the beginnings of a true crisis or does its slowing growth rate reflect a welcome and inevitable step back from inevitable growth rates?

(2) If the Chinese economy were to experience its own recession, how would such a recession affect the rest of the world’s economies?

(3) Are China’s options for shifting its economic structure viable and likely to work?