Understanding the Chinese Economic Slowdown

The Yuan, China's currency.

The Yuan, China’s currency.

China is the world’s second- largest economy and leading exporter, but its mammoth economy is slowing down, causing jitters among investors and policymakers. Mihaylo Economics Professor Robert Mead discusses the current state and future of the Chinese economy.

After rising for six consecutive years, U.S. stock markets have been in danger of falling into bear market territory-defined as a decline of at least 20% from a peak –this summer for the first time since the Great Recession of the late 2000s. After peaking at 18,351 points in May, the Dow Jones Industrial Average fell to 15,370 in late August, a decline of more than 16%. The stock market has continued its volatile moves in September. Investors, financial planners and economists agree that fears of a slowdown in China’s economy are largely to blame for the stock market maelstrom.

China’s Shanghai Composite Index, which soared to more than 5,000 points earlier in the year, has fallen to around 3,000 points this summer, a decline of about 40%. Much of the concern lies with the quality of China’s economic data, which is generally less transparent than that of the U.S.

“China’s economy is slowing down. They have had an extended period of double-digit growth, but there’s a limit on how long this growth can last,” Mihaylo Economics Professor Robert Mead says. “The country’s labor cost advantage is shrinking and the Chinese population is aging, which hurts an economy based on exports.”

Despite the slowdown, Mead cautions against making the assumption that China is falling into the economic doldrums. “A slowdown in China’s economy doesn’t mean China’s economy is slow,” he says. “Growth rates of 7%, for example, while below the 10% rate that the government has long targeted, are still much higher than U.S. or global averages.”

“China’s growth has been based upon manufacturing and exports rather than consumption and services, as is seen in mature industrialized economies,” he says.

The global implications of the Chinese slowdown are far from certain. “It is clear that China’s growth rate impacts other countries, such as Southeast Asian states, that provide the country with raw materials,” Mead says. “However, China has not demonstrated that it has become a global growth leader the same way North America and Europe are at present.”

Mihaylo Economics Professor Robert Mead

Mihaylo Economics Professor Robert Mead

Yet China is slowly but surely becoming a true economic superpower. Most economists either believe China has already passed or that it is only a matter of time until China surpasses the U.S. as the world’s leading economy. Mead notes much depends on how the country exercises its economic clout. “China is now clearly involved in international investment in developing countries, such as in Africa and South America, but the impacts are still to be seen.”

As China’s population exceeds one billion, its per capita income is much less than the U.S., despite an overall GDP level that is nearing parity. “China is trying to transition to a more consumption-oriented economy, but this is difficult since China is still a middle-income country; it has not reached developed country status yet,” Mead says.

For more information on Mihaylo’s economics program, visit the Department of Economics at SGMH 3313 or online. For more on Mihaylo’s Applied Securities Analysis Program (ASAP), which provides finance students with the opportunity to develop a real-world investment portfolio, visit the program website or contact Michael Milligan at mmilligan@fullerton.edu.

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I'm Daniel Coats, a CSU Fullerton Communications graduate student
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