Why China's slowdown should worry us all

Bags factory in Shenzhen Image copyright Getty Images

China's economy slowing down is not news in itself. For years, Beijing has broadcast that it's going to focus on quality - not quantity - of growth.

But still, we should be worried.

Slower growth in China means slower growth for the rest of the world.

It accounts for one-third of global growth. Jobs, exports, commodity producing nations - we all depend on China to buy stuff from us.

Slower growth in China also means it is harder for China to address its mountain of debt, even with the Communist Party's undoubted ability to be able to support the economy.

Crunching the numbers

One important caveat: It's important to remember official growth figures from China should always be taken with a pinch of salt. Growth is thought to be much lower than what Beijing says it is.

A good guide, I've been told, is to discount 100 basis points from what the government says to get a more realistic sense of how the economy is doing.

With the latest figures that means China's annual growth rate could be as low, if not lower, than 5.6%.

The impact in Asia

Over the past decade, China has become the largest trading partner for most of Asia, buying up integrated circuits, crude petroleum, iron and copper ore.

So if China slows down and doesn't buy as much stuff from the region, it slows down too.

Growth in the Asia Pacific region is expected to slow this year to 6% from 6.3% last year, according to the World Bank.

More pessimistic views show emerging Asia growing at its weakest rate since the financial crisis, echoing China.

The US-China trade war isn't helping either. It may not have caused China's slowdown, but it is depressing sentiment at a time when China could do without it.

Economists say many of Asia's economies that sell to China - such as Taiwan, Korea, Singapore, Malaysia and Vietnam - will be hardest hit.

The data is already confirming this. The worry is that as China's economy slows, consumers there will buy less.

Confidence amongst Asian companies is also wobbly, showing China's slowdown as one of two main concerns for growth in 2019, along with the US-China trade war.

India still thrives

Still there is some cause for optimism in Asia.

India's economy - the world's fastest growing - doesn't sell as much to China as some of the smaller countries in Asia, as this study from the Asia Development Bank shows.

The World Bank expects India to post 7.3% annual growth this year and 7.5% over the next two years.

Increased spending by India's middle class is expected to help boost growth in the country, and despite a major political event coming this year in the form of elections, that steady growth is expected to continue.

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Beijing lends support

China has pumped in more than $80bn (£62.2bn) into the financial system to encourage lending by banks to companies so they can hire more people and build more factories.

There is no evidence to show that this is happening yet, but most economists agree that by the end of the year economic activity should have picked up.

Tax cuts are also expected in 2019, and that could lift growth by about half a percentage point according to JP Morgan.

Japanese bank Nomura agrees, saying that China will see a rebound in second half of this year and that's when Asia will "shine", and will start to be "widely appreciated as the undisputed locomotive of the world economy."

Then there's also an unintended, but positive, effect of the US-China trade war, which is evidence of increased business for countries such as Vietnam, Malaysia, India and the Philippines as companies shift their supply chains from China to escape tariffs.

Still, longer term the world will have to get used to a slower rate of growth in China, as Mark Williams of Capital Economics points out.

"As China gets richer, its growth rate is going to slow. All successful economies go through this," he said. "That growth will slow even more significantly in the next five to 10 years."

Which means the next time you see a headline that says China's growth is slowing down, don't be surprised. Be prepared.

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