China: Too Optimistic?

For the seventh straight quarter (July – September) China’s economy has slowed, missing government targets for the first time since the financial crisis. Growing 7.4% year-on-year in the third quarter of 2012 has prompted warning from major companies Nokia and Nestle.

China became the world’s second largest economy in 2010, overtaking Japan and has increasingly played an important and influential role in the world economy. This was due to the introduction of private business, which has helped to develop a free-market economy. Since, it has exceeded predictions and grown at a staggering rate, however, a fall to 7.4% GDP growth raises questions about the stabilisation of such a large economy.

“This is within expectations, the economy is showing signs of stabilising”, said Dong Tao, an economist at Credit Suisse.

The cause of the slowdown is said to be partly due to the development of other world markets; a slowdown in exports; a response to tightening policies and a slowdown in the property sector. But in-turn, consumption in China has held up, which has helped to achieve a soft landing.

Despite, a joy-filled response from recession stalked economies; China’s downfall represents a sharp slowdown for the economy and could cause serious problems for international corporations. However, China is not dissatisfied with the figure. Prior to the slowdown, economists predicted similar forecasts. Western firms are preparing for the stabilisation of China’s economy in upcoming years as Beijing said it expected growth to stabilise at 7.5%.

The German company Nestle, released figures, which showed that sales recently fell from 11.6% to 9.4% in Asia, Oceania and Africa, thus suggesting that China’s sharp slowdown has caused weaker international sales. Furthermore, a 27% fall in Swiss watch sales across China was caused by the economic slowdown that also hit mobile phone importers and German car manufacturers. The sale of many luxury products has declined due to uncertainty in what the future of the economy holds. Some retailers say monthly sales have fallen by as much as half this year and the Chinese shipbuilding industry association says summer orders were down by almost half from a year earlier.

China being their largest trading partner, Japan (third largest economy) has also been affected by the slowdown. Statistics released by the Finance Ministry reveal that the value of exports to China in August fell 10% from a year earlier, during the third consecutive month of decline. A slowdown in GDP will also affect other countries that have a high trade linkage with China. This could therefore hinder world economic growth and lead to a cycle of falling growth. Furthermore, a slowdown could also put a huge burden on the U.S. economy as they help recover the European crisis.

Other countries that have also been feeling the pressure include Brazil and Australia, who have both cut interest rates in an attempt to stimulate their economies. However, more recent figures show a slight recovery as the GDP increase rises to approximately 8%, thus showing the versatile nature of China’s economy.

The economic outlook of China, suggests that China’s growth will slow slightly. We also see further prospects for controlling inflation, which has been a big issue for China. Economists project a slight increase in their current account surplus due to a decrease in value of the commodities they import. However, there are two major risk factors that could change the future of China’s economy completely. One risk being the external environment and the change in foreign economies; for example Greece, which has had an international effect. The other being the property market, which is still under adjustment.

In conclusion, the slowdown of China’s economy has had a drastic effect on the world, showing us just how influential and important its economy really is.

Contributed by Alexander Wright

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