Question

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.

• China annual growth hits slowest in decades

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.

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.

• China mulls longer weekend to boost shopping
• Why are the Chinese buying fewer cars?

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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Required Question

Read the article and answer the following questions:

1. What is economic growth? Explain using the production possibilities frontier.
2. At what rate did China grow in 2018? How is this calculated? (Cite source)
3. What is UAE’s economic growth? (Find the latest possible numbers and cite a source)
4. Why is slowing economic growth in China a problem for the rest of the world? Explain in not more than 300 words. [4 points]
5. Name 3 things China can do to fix the problem of slowing growth.

Answer 1

· Economic growth:

The concept of economic growth includes a lot of phenomena itself, other than growth of an economy. It can be defined as the increase in production of output or GDP in an economy over a time period, at least in two consecutive quarters. It can also be defined in terms of the economy's possibility of production by using the maximum level of its scarce resources. It does not necessarily include the quantitative changes in production of output in an economy, rather it involves the qualitative aspects as well, taking care of the structural changes in economy, types of new job opportunities etc. Thus, overall economic growth can be measured as a process that an economy goes through by acquiring growth in output while taking care of the cumulative growth in terms of the social and qualitative aspects as well.

Economic growth can be considered as the way an economy operates to increase the macroeconomic barriers, specifically considering per capita income. The efficient use of the available scarce resources starts this procedure, while raising the capability of aggregate production. The process of using the scarce resources for raising an economy's overall output level can be done using the concepts of production possibility frontier.

The production possibility frontier is the combination of maximum possible output can be produced in an economy for two products and services when all the resources are efficiently as well as fully employed. The relocation of one resource to other necessitates an opportunity cost to occur, such as:

i. There is a movement along the PPF when output of consumer goods is increased over fewer remaining resources for production of capital goods.

ii. If the law of diminishing returns holds, then this production of consumer goods measured in terms of the loss of production in capital goods will be increasing.

The PPF is generally a curve concave to the origin. Points inside the curve show that all the resources of the economy are not being entirely utilized. That implies inefficient uses of resources. The total output can be increased by moving towards the PPF. To attain this combination of inputs, the country might need technology improvement, improvement in factor resources by increasing the level of productivity.

The PPF is generally a curve concave to the origin. Points inside the curve show that all the resources of the economy are not being entirely utilized. That implies inefficient uses of resources. The total output can be increased by moving towards the PPF. To attain this combination of inputs, the country might need technology improvement, improvement in factor resources by increasing the level of productivity.

· In 2018, China’s economic growth rate was 6.6%. It is calculated by calculating the per capita GDP of the country. [Source: World Bank data: https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:CHN:IND:USA&hl=en&dl=en]

· UAE’s economic growth rate in 2018 is: 1.7%, calculated in terms of per capita GDP [Source: https://www.focus-economics.com/countries/united-arab-emirates]

China’s economy has been facing a slowdown from the past decades. After the global financial crisis in 2008, China became one of the most important country or driver for the world economy, as the other country’s got wounded. But now one of the largest economies in the world is facing expansion in the slowest rates since 1990. The industrial output growth in China has been slow with the slow sale values in retail market, while the rest of the world is also facing deteriorating environment.

The slowdown of China’s economy can be a worry for the rest of the world for several reasons. However, the impacts will be different, depending upon their extent of exposure.

1. The economies which are dependent upon exports of commodity, the demand in commodity market will be low. Thus lower demand for the goods can cause a fall in GDP for such countries. Australia, Canada, Brazil etc. comes under such condition.

2. The countries who consume those consumer goods will, in turn, possess higher demand. Thus an inevitable fall in the prices will be beneficial for such countries.

3. The change in demand in commodity market can increase the diversification including the first world countries like U.S. and some regions of Europe.

4. Some adjustment will take place in the global economy due to China’s slowdown, as the country has been one of the largest contributors to the economic growth all over the world over several past decades.

Thus, slowdown in China’s economy is a cause of concern as well as might be considered as a boon for the rest of the world.

· To fix this problem of slowdown, China can think of the following problems to be solved:

1. China’s demographic structure can be described as a disaster. The rate of working population i.e. labor force participation rate is already low and is going to fall further in the coming years. Thus, as a policy prescription, China should think about lowering their birth rate which in turn can increase the level of economic growth, as unemployment declines.

2. Due to the low level of employment, the productivity level is also facing a low rate. If the productivity rate can be speed up, it can increase the production level directly.

3. Eradicating China’s government debt crisis, by taking care of the economy’s leadership problem, fiscal policies and government budgeting, the growth rate could be increased further.