China’s economic slowdown, its ripple effect

Understanding the causes and the magnitude of China’s present-day economic challenges is essential.

The news about China’s economic slowdown has caused mixed reactions. China, for long, had been worried about fears of a slowdown and a middle-income trap. Now, there are fears of deflation which may bring bad news for China and the rest of the world. Thus, understanding the causes and the magnitude of China’s present-day economic challenges is essential.

Speaking at the National People’s Congress (NPS) in 2007, then Premier Wen Jiabao had cautioned that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable”. It was expected that some form of course correction would be undertaken in the subsequent period. However, as the world experienced the global financial meltdown in 2008, China chose the strategy of investing in infrastructure that included railways, highways and the energy and construction sectors. It had swept the core problems of a lack of consumption, regional inequality, and lack of social security under the carpet in order to sustain double-digit growth rate. Why it did was simple — the domestic legitimacy of the leadership in China has depended on creating prosperity and making it available to a greater number of citizens, year on year. However, by the time Xi Jinping came to power, the steroids had run their course and the wean-off period was worse off. Chinese financial markets suffered from lack of regulatory oversight since loans to business were distributed on the basis of proximity, or the famous Chinese term Guanxi — the nodal networks based on factions, friendships and relationships.