Impact of a Chinese Economic Slowdown

A fascinating drama is about to be played out in the world's biggest country. China's economy is growing too fast for comfort, and the country's leaders know it. In recent weeks they have promised forceful measures to cool things down, but it is not clear what they will or can do. Rumours are rife that China's central bank may raise interest rates for the first time in nine years.

The authorities have tried to restrain investment, prices and lending through administrative fiat. The challenge facing them would be difficult for policymakers anywhere: to slow the economy enough to ensure sustainable growth, but not so much as to cause a damaging crash, the much-feared hard landing. But the task of China's policymakers is doubly difficult because they have far fewer tools at their disposal than their counterparts in developed countries (see article). Thousands of state-owned firms, as well as the banking system, do not respond much to pricing signals or interest rates. It is not only 1.2 billion Chinese who should hope that their leaders succeed despite these handicaps. The rest of the world also now has a huge stake in China's continued economic health.

During the past three years China has accounted for one-third of global economic growth (measured at purchasing-power parity), twice as much as America. In the past year, China's official GDP growth rate has surged to 9.7%. Even this may underestimate the true rate, which some economists reckon was as high as 13%.

China's scorching growth has helped to prop up other economies by sucking in imports, which surged by 40% last year alone. While America's industrial output has shrunk over the past three years, China's has increased by almost 50%. As a result, its demand for commodities has skyrocketed, driving up prices. Last year it consumed 40% of the world's output of cement. It also accounted for one-third of the growth in global oil consumption, 90% of the growth in world steel demand, and more than the whole of the increase in copper demand. If China's economy slows sharply, commodity prices will fall everywhere, especially hurting producers in countries such as Russia, Brazil and Australia, which have gained so handsomely from China's boom.

For good reason, everyone should worry about a Chinese economic slowdown. Stay tuned. Here for more.