Rise of China’s economy

“China has become a larger, more powerful and a more influential economy,” said Eswar Prasad, a former chief of the International Monetary Fund’s China division (Mohsin and Curran, 2016). It should come as no surprise to anyone that economic growth in China has a profound effect on the global economy. After all, China has one-fifth of the world’s population, or approximately twice the population of the United States, the European Union, Japan plus a handful of other high income nations. Notably in 2009, China surpassed Japan to become the world’s second-largest economy after the U.S. with a nominal GDP of $5.06 trillion, edging Japan by $20 billion (shown in Figure 1 where the blue line converges and eventually overtook the red line around year 2009).

Figure 1: Nominal GDP Figures of the 3 Largest Economies in the World from Year 1997-2015.

Source: (The World Bank, 2016)

Forces behind the slowdown

However, when an economy gets bigger, it becomes more difficult to maintain its growth at an exponential rate. In 2015, China showed lower-than-expected growth in its GDP, and it sparked the global concern over China’s economy. Changes in the economic structure and the surge of total debt are often regarded as culprits to this slowdown. Structurally, China’s economy face headwinds. As growth is a function of changes in labour, capital, and productivity, the growth rate would be robust if these 3 elements increases. However, these elements are currently contrary to the ideal conditions for growth. China’s working-age population peaked in 2012, whereas investment have also topped out at 49% of GDP. Adding on to the problem, China’s technological gap with rich countries is narrower than in the past, implying that productivity growth will be lower too (The Economist, 2015).

Besides, another more important factor for China’s slowdown is its rising total debts. Total debts, inclusive of government, household, and corporate debts, has climbed to about 250% of GDP, experiencing more than 100% increment since 2008. Worse still, most of the credit flowed towards property developers. The real-estate sector, which previously accounted for some 15% of economic growth, could face outright contraction due to record high number of unsold homes stockpiled in inventories of these property developers. New property prices fell approximately 20% in the first two months of 2015 compared with the same period previous year (The Economist, 2015). Similar to the 2008 financial crisis, if the property prices decline after the housing bubble bursts, banking system of China would be in trouble as loans to the highly levered property developers have a higher risk of being defaulted. Consequently, the mortgages market will be adversely impacted, sending the whole financial market in turbulence (Tu, 2016).

Impact on global economy

China has turned into a force to be reckon with in the context of the global economy, and in the event of an economy slowdown, it would inevitably affect the rest of the world. As of year 2014, China is the the largest exporter and the second largest importer of goods and services in the world (The Observatory of Economic Complexity, 2014). Given the circumstances, its slowdown in growth of GDP could lead to a ripple effect towards the world economy and various sectors.

Prices of commodities have been adversely affected in a direct or indirect manner. Taking the example of crude oil, even though the abundant supplies from U.S. and Gulf Arab Allies (mainly OPEC members) played an important role in over-supplying the oil market, the reduction in demand for crude oil from China further applied downward pressure to the price of crude oil. The price of Brent crude (the main international benchmark of oil price) has fallen by about half since mid-June 2015, complementing the first stage of the slide for the Chinese stock market (Krauss, 2016).

Oil is just one of the many commodities that are losing value as a result of falling demand. As China is the world’s largest consumer of iron ore, lead, steel, copper and many other investment commodities, the decreasing demand has hurt the major exporters for all these commodities to China. The affected nations contains a mix of developed and developing countries, such as Australia, Brazil, Peru, Indonesia and South Africa. As shown in Graph 2, the economy growth rates of these countries shows a positive correlation with China’s growth trend (trend moves in the same direction). To a more drastic extent, the sharp decline in commodity prices may even pose deflationary pressures on the global economy.

Figure 2: GDP Growth Rate from 2005-2015 of countries correlated to China.

Source: (The World Bank, 2016)

However, the inevitable fall in commodity prices could be beneficial for other countries that consume the commodities, for instance, United States and Japan which are the top net importers of oil; United States and Germany which are the top importers of Iron and steel in the world.

Impact on Malaysia

Looking in the context of Malaysia, China is also the second largest importer in which it accounts for 13.1% of Malaysia’s overall exports in 2015. Due to that, the slowdown in China has drastically hurt the exports value of Malaysia. From 2015 to 2016, the total exports to China has decreased RM6.3 billion from RM74.2 billion to RM67.9 billion, a decrease of 8.5% in the span of 1 year (Malaysia External Trade Development Corporation, 2012)!

Besides that, the falling commodity prices, especially oil prices, had taken a huge toll on Malaysian economy. Since oil is one of Malaysia’s major exports and source of revenue, the plunge of oil prices had not only impacted on the GDP rates (due to the reduction in value of exports), it also caused the Malaysian currency to depreciate. Even though the fall of oil prices and the slowdown of exports cannot be cited as the sole reasons for the depreciation of Malaysian Ringgit, the movements of major economies in the world, in this case, China, will lead to chain reactions towards the economy of Malaysia. Putting it as a metaphor: when China sneezes, Malaysia would get a cold, for sure.


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China's impact on the global economy



The Economist (2015) Why china’s economy is slowing. Available at: http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-8 (Accessed: 16 November 2016).

Krauss, C. (2016) Oil prices: What’s behind the volatility? Simple economics. Available at: http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0 (Accessed: 17 November 2016).

Malaysia External Trade Development Corporation (2012) Top 10 Major Export Countries, 2016. Available at: http://www.matrade.gov.my/en/malaysia-exporters-section/33-trade-statistics/4571-top-10-major-export-country-2016 (Accessed: 18 November 2016).

Mohsin, S. and Curran, E. (2016) Trump faces China Economy that’s changed much in Eight years. Available at: http://www.bloomberg.com/news/articles/2016-11-09/trump-faces-very-different-chinese-economy-than-eight-years-ago (Accessed: 16 November 2016).

The Observatory of Economic Complexity (2014) China (CHN) exports, imports, and trade partners. Available at: http://atlas.media.mit.edu/en/profile/country/chn/ (Accessed: 17 November 2016).

Tu, L. (2016) China Property bubble could cause $600 Billion in bad debts. Available at: http://www.bloomberg.com/news/articles/2016-10-06/china-property-bubble-could-cost-banks-600-billion-in-bad-debts (Accessed: 17 November 2016).

The World Bank (2016) World Bank Open Data. Available at: http://data.worldbank.org/ (Accessed: 16 November 2016).