China growing at slowest pace in 7 years

Sources: China GDP Growth May Cool to Slowest Pace in 7 Years, Bloomberg; China’s Zhou flags risks to 2009 growth goals, Forex News

China’s exports collapsed in the fourth quarter, causing its expansion rate to drop to its slowest pace in seven years. The Asian country’s gross domestic product grew by only 6.8 percent this last year and that growth rate has fallen by 9 percent in the last three months. China's growth rate in 2007 was 13 percent. The slowed growth rate has put pressure on the Chinese government to introduce new stimulus measures to prevent the drop from further undermining economic growth in Asia.

The decreased demand for Chinese exports has not only hurt the Chinese economy, but is causing problems throughout Asia. China imports large quantities of parts and materials from other Asian countries, such as Taiwan and South Korea. Because the demand for Chinese exports has dropped, China’s demand for the parts and materials necessary to produce those exports has also slowed. The decreased demand in the Chinese markets for exports from other Asian countries has worsened the problems faced by other Asian countries during the current global financial crisis. Japan, for example, shipped 19 percent of its exports to China in 2007 and, since it is experiencing a decrease in Chinese demand for those exports this year, its economy is slowing in conjunction with China’s. Other countries hurt by the lack of Chinese demand include Taiwan, which shipped 36 percent of its exports to China and South Korea, which shipped 25 percent.

The Chinese government has promised to take more measures to shore up its economy. It has already laid out a 4 trillion yuan ($585 billion) stimulus package, which was unveiled in November, and the central bank is considering adding more interest rate cuts to the 5 it has implemented since September. Experts also expect that the government will reduce reserve requirements for banks, which will allow them to lend more money to stimulate the Chinese economy. The experts hope that if the Chinese economy improves, the economies of other Asian countries will follow suit.

Questions

(1) What steps can China take to bolster its economic growth?

(2) What will an ailing Asian economy mean for the United States and the rest of the world?

(3) What steps can other Asian countries, such as Japan, South Korea and Taiwan, take to reduce their dependence on the Chinese demand for their exports and improve their own economic prospects?