Commentators often speak of India and China in the same breath. While they describe India as an elephant which has only recently learnt to dance, China is described as a flying dragon because of its consistent double digit growth over the last decade. China’s annual GDP average GDP growth in the year 2001 to 2011 was a staggering 10.5%. But recently even this dragon seems to have landed. Its year to year growth rate in the second quarter was just 7.5%, the lowest since 1990.
Why has China’s economy slowed down? It is because China is re balancing its economy by moving away from its investment and exports led growth to domestic consumption. China has achieved double digit growth rate mainly through massive investment in infrastructure and capacity expansion and exporting its products to the world. But due to recession that has gripped US and Europe, Chinese exports have slowed down dramatically. The result is China’s banks are now sitting on bad loans and its over investment has overtaken even the world economy. Chinese net exports plunged from 8 percent of GDP to 2 percent, investment in China rose from 43 percent to almost 50 percent and total credit increased to about 200% of GDP.
The Rongsheng, China’s biggest private-sector shipyard is now idle. 80% of the new residential buildings in the Hainan island tourist destination is vacant. Major steel mills have reported losses of around 1 billion yuan due to over capacity. The capacity for making heavy earth-moving equipment is almost double the global annual demand.
China has been the growth engine of the world and the slowdown is likely to have an adverse impact on the global economy. What is interesting is that growth of all the other countries in the acronym BRIC has plunged. The economist says, “WHEN a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets, the world economy’s 21st-century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply.”
To combat the pressures of a slowing growth the two obvious solutions are shifting to domestic consumption and fixing the Chinese banking system. But as the Chinese population is ageing the former is likely to be difficult.