The Implications of China’s Growth Slowdown


The once extraordinary rate of Chinese economic growth is slowing. In 2014, China’s GDP grew at an official rate of 7.4 percent, slightly less than the stated goal of 7.5 percent. Although more recently monthly data have been more robust, the trend towards slowing growth seems inexorable.

A decelerating Chinese economy, coming at a time of global economic uncertainty (especially in the eurozone), could have dramatic economic implications throughout the world. However, the repercussions of a Chinese economic slowdown would not be limited to the economic sphere. Given the incredible importance of economic growth to political stability – both within China itself and East Asia in general – adapting to a dampened Chinese economy will be a pivotal challenge in the Asia-Pacific.

While an official GDP growth rate of 7.4 percent would be the envy of most major economies, this figure represents China’s lowest economic growth since 1991. And of course, economic data from China’s National Bureau of Statistics is not completely trusted by all observers. Local officials (and the central government itself) have a vested interest in exaggerating their economic performance. Capital Economics, a London-based research group, monitors the Chinese economy by looking at the five factors of electricity output, freight shipmen, construction, passenger travel, and cargo volume. According to this China Activity Proxy, recent annual growth is closer to 5.7 percent.

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Regardless of the statistical specifics of the Chinese slowdown, this development poses some degree of political risk for the Chinese state. For more than two decades economic growth has been the major factor in ensuring political stability in China. Many Westerners forget that the massive protests that rocked Beijing and other Chinese cities in 1989 coincided with the biggest economic crisis of the post-Mao era, with annual inflation of 30 percent leading to panic buying throughout the country.

Since 1990, China has been governed by a social contract in which the material lives of ordinary citizens improve dramatically while the Party keeps a monopoly on political power. Rising wages and standards of living helped ensure political stability. Historically most revolutions, including the recent upheavals in the Middle East, only reached critical mass when a majority of a country’s people lost hope in the economic capabilities of the governing political structure.

Recent initiatives by the Chinese state can be understood in light of these economic concerns. Since coming in to power in 2013, the administration of President Xi Jinping has launched several populist measures. Posters throughout the country combine traditional Chinese themes with Communist Party slogans to promote the “Chinese Dream.” Xi’s campaigns against lavish banquets and other government waste led to a significant drop in the price of high-end liquor soon after his rise to power. Perhaps most important has been a massive anti-corruption campaign, which has netted thousands of corrupt officials, from minor bureaucrats to the massively powerful former head of internal security.

The anti-corruption campaign in China has been so far-reaching that it is now having negative effects on the Chinese economy. These effects create something of a contradiction in the Chinese polity, because although the anti-corruption campaign enjoys widespread support, it appears to be having some detrimental effects on the main economic pillar of Chinese political stability. Besides dampening the high-end liquor market, the anti-graft and ant-waste campaigns have had deleterious effects on industries from tourism and gambling to real estate. Mao Daqing, deputy chief executive officer of the largest property developer in China, openly warned of the economic impacts of the political campaign: “For us developers, the impact of the anti-corruption campaign on the sales of high-end property is very serious.”

China’s once-booming housing market is now deflating, with prices falling in a majority of cities. Prices appear to be dropping because the rapid increase in housing supply in recent years has outstripped demand. Problems in the real estate market are mirrored by other macroeconomic troubles. Much of the low-hanging economic fruit in China has been plucked. Rising wages in China have led many manufacturers to relocate to countries such as Vietnam or the Philippines. China’s historically strong international trade is also taking a hit, with exports down 3.3 percent from a year ago and imports dropping nearly 20 percent.

In June 2014, Chinese Premier Li Keqiang pledged to maintain a robust growth rate: “China’s economy needs to grow at a proper rate, expected to be around 7.5 per cent this year… Despite considerable downward pressure, China’s economy is moving on a steady course. We will continue to make anticipatory and moderate adjustments when necessary. We are well prepared to defuse various risks.”

Indeed, since this pledge and the subsequent slowdown, the central government has used macroeconomic tools to boost growth. The People’s Bank of China cut interest rates in November, and more recently lowered the reserve requirement ratio, freeing up $100 billion for lending. China has weathered previous economic predicaments, for example the 2008 global financial crisis, and emerged stronger. A hard landing is by no means a foregone conclusion, and China still has many macroeconomic advantages.

However, for all the policy tools at Beijing’s disposal, China’s leaders cannot guarantee rapid economic growth forever. It may be necessary to lower economic expectations, while shoring up the state’s popular legitimacy through non-economic means. Back in 2013, Xi criticized the myopic focus on economic growth, saying “We should never judge a cadre simply by the growth of gross domestic product.” More recently an article in China’s NetEase quoted Fudan University Department of Finance professor Kong Aiguo as saying, “Since we are entering what is called the ‘new normal’, we should not worry about the speed of GDP, bur rather we should focus on livelihood issues, public welfare issues, entrepreneurship issues, and financial transparency issues.”

Adapting to China’s “new normal” of lowered GDP growth will be an important challenge for leaders in China and around the world. China does more international trade than any other country on earth. Besides issues of trade, any problems in the Chinese financial system could have serious global impacts, especially coming at a time of relative global economic uncertainty.

If China does face a prolonged period of economic difficulty, the political repercussions could be volatile. The Chinese state might be forced to look for alternative sources of popular support. China’s leaders could implement additional populist measures. It is also possible that increased nationalism could come in to play, especially in the unresolved territorial disputes in the East China Sea and the South China Sea. Regional and global powers would be wise to monitor China’s economic situation closely.

Brendan P. O’Reilly is China-based writer and educator. His specialty is Chinese foreign policy.

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