The Impact of the Slowdown of the Chinese Economy on Other Economies in Asia and Australasia - Case Study Example

hе Imрасt Оf Thе Slоwdоwn Оf Thе Сhinеsе Есоnоmy Оn Оthеr Есоnоmiеs in Аsiа Аnd Аustrаlаsiа Name Institutional Affiliation Date Thе Imрасt оf thе Slоwdоwn оf thе Сhinеsе Есоnоmy on Оthеr Есоnоmiеs in Аsiа and Аustrаlаsiа Introduction There are indications that China’s economy is undergoing a slowdown after thirty years of rapid growth. Following the pro-market reforms of 1970s, China entered a period of steady growth, which transformed the Asian country from a third world nation into a leading global economic powerhouse. Today, China is very powerful economically, and is having a huge impact on the economic growth of other countries in Asia and the world. Over the years, China has been integrating economically with regional countries such that any economic shocks in China results in quick ripples across the region. Thus, many regional countries are likely to be affected by the decline in China’s economy. Worse, the ongoing contraction in China’s economy has happened at a time when most countries are struggling with effects of the 2010 global credit crises (World Bank, 2015). The objective of this paper is to evaluate the effect of China’s economic slowdown on regional countries in the Asia-Pacific region. Specifically, the paper will look at the case of New Zealand, which is one of the regional countries strongly dependent on China for trade and economic growth. It can be noted that China and New Zealand have maintained strong trade relationships since 1980s. These relationships have been of mutual benefit to both countries such that any slight changes in the economic variables of either country can be felt in the other. The paper is divided into two major parts. The first section gives a background on the level of economic interdependence between China and New Zealand. This section also gives a brief history of China’s economic growth. The second part explores the specific impact China’s economic slowdown is having on New Zealand. Also discussed in this part is the history of China’s economic slowdown and how it is causing shockwaves in other countries. Because China has the largest and most influential economy in Asia, the case in New Zealand is similar to that in many Asian countries that maintain strong economic relationships with China. Background to the Economic Linkages between China and New Zealand As from 1980, the economy of China has been expanding at an average annual rate of 9.9%. Its share of the world’s normal GDP increased from less than 2% in 1990 to 13% in 2013. During this period, the Asian country’s Gross Domestic Product increased tenfold, making China a top global economy. In terms of international trade, China is the largest exporter in the world, accounting for 11% of the global merchandise exports. Accordingly, Chinese companies have become more integrated with the global supply chains. In addition, China’s large population accounts for a large share of the world’s total demand for consumer goods and services (World Bank, 2015). According to ADB (2015), the growth of China’s economy since 1980 was fuelled by reforms aimed at making the economy market based, a drastic change of labor from basic agriculture-dependent to industrialization, and substantial increase in physical capital. China’s accession to the world trade ushered in an era of steady assimilation with international markets, reflecting a desire to foster an export-oriented economy. Resultantly, the level of China’s trade with regional countries increased considerably. One of these countries that benefitted significantly from China’s growth is New Zealand. The Asian country is today the most important trading partner after the neighboring Australia, 14% of imports and 20% of exports in 2014. Chinese companies have invested heavily in New Zealand, making China to account for 14% of New Zealand’s foreign direct investment. China remains the most important foreign destination for forestry, dairy products, fish products, meat and wool products from New Zealand. The volume of these exports has grown steadily since 1990, making China a strategic trade partner for New Zealand (Garnaut, Cai & Ligang, 2015). In 2008, the two countries signed a free trade agreement, with New Zealand becoming one of the first Organization of Economic Cooperation and Development (OECD) country to do so. During the eight years that this agreement has been in place, New Zealand has witnessed a strong increase in the value of primary exports to China, mainly due to the removal of tariffs and the regulatory value of the agreement. Unlike commodities, services are a significantly small share of the total value of exports to China. Currently, education is most important service exported to China from New Zealand. Since 1980, China has been largest source of overseas students for New Zealand (Bowman & Conway, 2013). In terms of imports, imports from China consist mainly of machinery, automobiles, electrical, textiles, furniture, toys and chemical products. Due to the low cost of production in China, many New Zealand and Australian companies have relocated their plants to China to reduce costs. Although China accounts for much of New Zealand’s net imports, the share of imports for China is significantly smaller than the actual share of the country’s added value (Bowman & Conway, 2013). This is because China provides assembling services for diverse products designed and manufactured in other countries. Thus, although China exports a wide range of products to New Zealand, most of these products are not originally from China because they have been manufactured in other countries. Mobile phones and computers are a god example of this. Nonetheless, the above statistics are indicative of the sheer level of economic interdependence between China and New Zealand. With China’s growing influence in the global economy, New Zealand depends greatly on this Asian country for long-term economic growth and survival (Osborn & Vehbi, 2013). Effects of the Chinese Slowdown on New Zealand Since 2010, China’s economic growth has slowed significantly, mainly due to the effect of the global financial crisis. After thirty years of more than 9% annual GDP growth, China’s economic growth slipped to less than 6.8% in 2015. This has raised fears among investors that China’s economy could be headed the wrong direction. Official reports show that between 2012 and 2015, thousands of small and medium enterprises across China were forced to close business as a result of the economic slowdown. The closure of businesses in the manufacturing sector has had adverse effects not only on China’s economy but also on the global economy. In China, the rate of unemployment has risen sharply over the past few years. For the world economy, the downturn in China’s industrial sector has led to a steady decrease in China’s demand for foreign supply of machines, equipment and commodities such as metals and crude oil. This resulted in an increase in China’s trade surplus, adding further tension to the already delicate trade relations between China and other countries (Garnaut, Cai & Ligang, 2015). Due to the fact that China’s economy is strongly integrated with the global economy in terms of investment and trade, the current economic situation in the country has implications beyond its borders. While China’s import of commodities during the boom period stabilized global commodity prices, the ongoing slackening of the economy has had negative effects on regional countries that have strained their trade relationships with China. In New Zealand, these effects can be felt in terms of decline in currency value, rising unemployment and economic slowdown. Currently, New Zealand is facing a slump in the growth of exports to China. A similar trend has been witnessed in other regional countries that depend on exporting Goods to China. These countries include South Korea, Australia, Malaysia, Thailand and Indonesia (Osborn & Vehbi, 2013). It is highly likely that China’s current economic decline will lead to mixed reactions in New Zealand’s real estate markets. The demise of New Zealand’s economic boom fed by China’s asset investment will lead to contraction of the real estate market. This will partly be as a result of prospective home buyers having little incomes to buy homes. Moreover, Chinese demand for real estate properties in New Zealand will take a hit if the economy plunges further. The real estate being one of the best performing sectors in New Zealand, stifled growth will have adverse effects on the national economic outlook (Garnaut, Cai & Ligang, 2015). According to Steenkamp (2014), given China’s negative growth trajectory, it s probable that it will not be importing massive commodities from New Zealand in the next few years. The implication of China’s projected long term slowdown is that New Zealand and other regional countries will have to adjust to a major trade partner with a reduced appetite for imports. Although the changing economic outlook in China may result in consumer oriented demand for specific categories of commodities, the service industry such as banking and tourism will suffer massively. Luckily, China’s declining growth rate is quite slow and New Zealand may have time to adjust as China’s role in the global economy changes (Kireyev & Leonidov, 2016). In the event of a prolonged slowdown in China’s economy, there are two primary channels in which New Zealand’s economy will be affected further. The first one is through trade. Currently, China has a well developed and large export market for goods from New Zealand. This figure is high meaning that any further economic stall in China could be devastating to New Zealand’s export revenue. The second channel is via financial interactions. China is one of the largest holders of debts from New Zealand. Sustained slowdown in China’s economy may compel the government to sell foreign securities to stimulate the economy. This will cause a sudden fall in New Zealand’s bond prices and hence a rise in interest rates (Bowman & Conway, 2013). Conclusion In conclusion, the impressive economic performance recorded in China in the past few decades has seen the Asian country emerge as a global economic power and a major source of economic growth for other countries in the region. Today, China is a strong economic powerhouse, second only to the US. It is also the largest exporter in the world and has a well developed domestic market for imports. Because of its increasing influence on the global economy, regional countries rely on China for economic growth through bilateral trade. However, the increasing importance of China for Asia-Pacific countries presents not only opportunities but also macroeconomic risks. The current downturn in China’s economy has spilled over to neighboring countries including New Zealand, which depends greatly on China for its export trade. As a result f the economic slump in China, New Zealand’s economy is likely to plunge into a period of decelerated growth. In particular, the export sector in New Zealand will be hard hit due to China’s inability to maintain the level of its imports from New Zealand. References ADB (2015). Asian Development Outlook Supplement. Accessed 26 September 2016. http://www.adb.org/sites/default/files /publication/161734/ado-supplement-july-2015.pdf Bowman, S. and Conway, P. (2013). The outlook for China’s growth and its impact on New Zealand exports. New Zealand Treasury Working Paper, 13/16. Garnaut, R., Cai, F. and Ligang, S. (2015). China: A New Model for Growth and Development. Accessed 26 September 2016, http://press.anu.edu.au/titles/china-update-series/china-a-new-model-forgrowth-and-development/pdf-download/ Kireyev, A. and Leonidov, A. (2016). China’s Imports Slowdown: Spillovers, Spillins, and Spillbacks. IMF Working Paper 16/51. Osborn, D. and Vehbi, D. (2013). Empirical evidence on growth spillovers from China to New Zealand. New Zealand Treasury Working Paper, 13/17. Steenkamp, D. (2014). How volatile are New Zealand’s terms of trade? An international comparison. Reserve Bank of New Zealand Bulletin, 77(2). World Bank (2015). China Economic Update. Accessed 26 September 2016, https://www.worldbank.org/content/dam/Worldbank/document/EAP/China/ceu_06_15_en.pdf Read More