5 things you need to know about the decelerating pace of China’s economy
China, the world’s second largest economy, just posted its weakest economy growth rate since 1990. According to the National Bureau of statistics of China, growth fell to 6.9 percent in 2015–the weakest pace in a quarter century and then it hit 6.8 percent in the fourth quarter, a rate lower than analysts expected.
Up until 2015, China was the fastest growing major economy in the world, averaging 10 percent for over three decades. Here’s what you need to know about the decelerating pace of China’s economy as a major global concern.
- Devaluation of China’s currency (Yuan)
The People’s Bank of China adopted a reference-rate policy aimed at strengthening the U.S. dollar and weakening the Chinese Yuan last year. The devaluation has led to unease in global financial markets thus leading to higher short-term volatility in currency, bond and stock markets as well as commodity markets.
- The Chinese government has a five-year social and economic plan in place
China’s policy makers have taken adequate measures to counter the decelerating growth by having interest rates and reserve requirement ratios cut from the People’s Bank of China. Also, the Chinese government has made development its top priority in a bid to revamp its economy. The government has affirmed that this move is aimed at doubling the size of the Chinese economy by $12 trillion by 2020. Furthermore, the government reiterated its long term plan to allow the market forces play a greater role in the economy and to put greater emphasis on higher consumption. The specific growth targets and the government’s full five-year plan are expected to be released in March 2016.
- China’s slow growth means the rest of the world will experience the same
Currently, China accounts for 15 percent of global output and the effects of the slowdown will be reverberated around the world. It thus appears that the double digit growth which the global economy benefitted from is unlikely to return. China’s inability to sustain its growth puts the global financial system at risk, said the International Monetary Fund (IMF). China is currently experiencing the effects of transitioning from an investment-driven to a consumption-driven economy, which should lead to more sustainable, though slower, growth. Unlike South Asian countries which have fewer economic ties with China, South east Asian countries and east Asian countries like Taiwan, Japan and South Korea, whose exports depend largely on china, will be adversely affected.
- China’s regional power is at stake
No doubt, China’s economic prowess has earned it a strong regional presence with a formidable military force. With more exits than entries into the country’s workforce this year, China will be the first large country to grow old before it grows even moderately rich. The Chinese government spends at least 20 percent of its budget on national security and this will see a drastic change in light of the economic crisis plaguing the country. This poses a great threat to the country since it remains strategically isolated.
- This will affect foreign direct investment in Africa
Over the years, Africa’s close ties with China has enhanced the continent’s growth and the current slowdown in China’s economic growth will hit Africa hard. Most countries in Africa will experience a decline in exports unless they improve their balance of trade with other countries. Resource-rich countries like Zambia and countries that receive foreign direct investment from China like Nigeria, South Africa, Ethiopia, Kenya and Uganda, could also experience reduced investment flows.
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