The recent decline in economic conditions in China, one of the largest economies in the world, is expected to have monumental impacts on the rest of the world, particularly China’s major trade partners. Western nations, such as Australia and the USA are set to be largely impacted by the rising economic crisis in China. Simultaneously, we must not discount the impact of this fallout on the Chinese population and their cost of living.
As mentioned before, China has one of the largest economies in the world, meaning that there is a strong indirect link between their economy and economies across the globe. China is home to approximately 20% of the world’s manufacturing as of 2020, according to Vox EU’s Centre for Economic and Policy Research. In addition, China is also the world’s secondlargest goods importer, making up around 11% of the world’s imports. So, we can see that China has direct connections to the rest of the world, particularly in importing and manufacturing. But before delving deeper, let’s ask ourselves; how did this downturn in the Chinese economy come to be?
It's simple, really. One of the main reasons for this slump is the increasing level of debt in the Chinese economy. Like all nations, China utilises debt to fund major infrastructure projects. But you may ask, doesn’t every country experience debt? Why is it China that is being impacted by a so-called economic downturn? Well, the thing is, China borrowed an excessive amount of funds to develop infrastructure, as a means of significantly boosting their GDP. Trading Economics reports that in 2022, China recorded a Government Debt to GDP Ratio of 77.10% of the country’s GDP. To serve as context, China recorded an average Government Debt to GDP Ratio of 37.08% from 1995 to 2022. This reflects a relatively higher level of borrowing undertaken by the Chinese government in recent years, as compared to previous periods. As if this is not enough of a strain on the Chinese economy, we must also talk about the property market’s role in this downturn.
The Chinese property market has been experiencing a downfall in recent times, due to increased individual concerns regarding job security and future incomes. The Global Treasurer reports a ‘sharp decline’ in the willingness of individuals to purchase homes in 2024. The same source also conveys the instability of real estate developers, reducing the level of consumer confidence in the Chinese housing industry. The ageing population of China also plays a role in the downturn in the property sector, as retired members of the population not intending to purchase houses and land is reducing demand for homes. And well, the downturn in the property market ties in with the bigger picture of China’s economic slump. According to Memri, 70 percent of the net worth of Chinese households is tied up in the property market, meaning that the decline in property values has led to a direct reduction in the wealth of millions of households in China. The decrease in average incomes of individuals in China causes a reduction in consumption spending and demand, playing a role in the downturn that their economy is experiencing. Moreover, with the Chinese government dealing with significant debt, they are essentially unable to stimulate the housing market through additional funding. Well, we’ve analysed the background of this issue. But what’s the influence of the economic slump in China on the rest of the world?
Let’s look at the home front. What is the impact of this downturn on Australia? Due to a reduction in overall demand amongst the Chinese population, there may be a decline in the level of production undertaken in China. One of China’s main resources for production is Australia’s iron ore, which as of 2022, was our second-largest export to the world, according to the OEC. In turn, the decrease in production levels in China would contribute to a fall in the demand for resources of production, particularly Australia’s iron ore. Consequently, this will have potentially monumental implications on the Australian economy, due to a significant fall in Australia’s level of exports to the world, tying in with a decline in our economic activity. But what about the rest of the world?
As economist George Magnus (University of Oxford’s China Centre) told the BBC, China accounts for approximately 40% of growth worldwide. Moreover, numerous companies world-wide, such as Apple, have a large consumer market in China, and the lack of demand and consumption in China will likely lead to reduced revenue for these companies. Subsequently, the reduced level of profits for companies will likely lead to them potentially downscaling the level of production elsewhere to minimise their costs and avoid wastage, which may result in job losses for workers. In turn, there will likely be a reduction in average incomes of households, reducing consumption spending, demand and worldwide economic activity. You may understand that a significantly low level of economic activity contributes heavily to a downturn and a potential recession. Therefore, the slump in Chinese economic conditions may have something of a domino effect on the global economy.
We have analysed the current concerns of the downturn in the Chinese economy on the wellbeing of its people and other global economies. Now, it is vital for us to consider the potential behaviours of the Chinese economy in the future, that may occur due to demographical elements, particularly an ageing and shrinking population. An ageing population reflects a greater proportion of the population moving closer towards retirement. This is said to reduce the quantity of the labour force, having detrimental impacts on the Chinese economy. Darren Tay, head of Asia country risk at BMI Country Risk & Industry Analysis, predicts that the Chinese economy will face a 1% slowdown in GDP growth due to an ageing population, according to CNBC. Tay called the risk of ageing “concerning” and “immediate”. So we can see that the aforementioned implications of the Chinese economic downturn on the rest of the world may continue into the future.
Various factors - such as debt, demand for housing and an ageing population - have led to a significant downturn in China’s economy. Consequently, this has and will continue to cause shockwaves worldwide, due to China being an influential member of the global economy. A reduction in Chinese demand for production materials, for example, is likely to contribute to a reduction in Australian exports, potentially causing detrimental impacts on our own economy. Lastly, the ageing population in China is expected to continue to cause similar problems into the future. Hence, China must overcome issues such as changing demographics and significant levels of debt if it is to continue as a global economic force.
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