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E&M Magazine: China’s Economic Slowdown: Causes, Consequences and Potential Implications

E&M Magazine: China’s Economic Slowdown: Causes, Consequences and Potential Implications

  • Nilza Tenguice & Yara Soto • Global Markets Analysts at Banco BIG

In December, the Chinese government approved an increase in the budget deficit to 4% of GDP by 2025, the highest figure ever, while maintaining an economic growth target of 5%. The new deficit indicator compares with an initial target of 3 per cent of GDP for 2024 and is in line with a more proactive fiscal policy, as defined at the Chinese politburo meeting in December. The additional one percentage point of spending as a percentage of GDP represents 1.3 trillion yuan (equivalent to around 180 billion US dollars) and is yet another measure among several that have been announced to stimulate the Chinese economy.

In recent years, China has faced an economic slowdown, which affects the global economy, given the country’s importance in international trade, in the supply chain and as a global production centre.

Among the main factors contributing to the slowdown are the weakening of the property sector, the zero-covid policy and its economic consequences, an ageing population, geopolitical and trade tensions, particularly with the United States, and rising corporate debt.

The property sector, which accounts for a significant portion of China’s GDP, has been facing a debt crisis for several years, exemplified by the collapse of property giants such as Evergrande. This scenario exposed the fragility of the sector, caused by excessive indebtedness. The slowdown in this sector has reduced demand for construction materials, damaging heavy industry and exports, as well as lowering consumer and private investor confidence. The ‘zero-covid’ policy adopted during the pandemic had a devastating impact on the economy: factory closures, interrupted supply chains and weakened domestic consumption significantly reduced economic activity. Although it was abandoned in 2022, the side effects of this policy still persist, such as a population reluctant to consume and a maladjusted labour market.

Trade tensions with the United States, exacerbated by the trade war that began in 2018, have also damaged the (Chinese) economy

China’s ageing population, which has accelerated in recent decades even after the end of the one-child policy in 2016, is another crucial factor. The birth rate has fallen and the labour force is ageing rapidly. There are significant economic implications, such as a shrinking labour force, increasing pressure on the social security system and a decrease in domestic consumption as a large part of the population enters retirement age.

Trade tensions with the United States, exacerbated by the trade war that began in 2018, have also damaged the economy. Increased import tariffs, restrictions on access to advanced technologies such as semiconductors, and sanctions on Chinese companies have affected essential sectors.

In addition, geopolitical issues, such as the dispute over Taiwan, create additional uncertainty for investors.

The substantial increase in corporate debt and the slowdown in credit, especially in the private sector and state-owned enterprises, have restricted the growth of small and medium-sized companies, which depend on financing to expand their operations.

This economic cooling of the world’s second largest economy has far-reaching consequences for the global economy. The reduction in demand for raw materials, such as oil, copper and food, could affect producer countries that have China as their reference export market.

As the engine of global trade, the country plays a key role in production and domestic consumption, which means fewer imports and mainly affects Asian countries and emerging economies that depend on exports. The slowdown also puts pressure on global supply chains, as China remains a crucial centre of production and export centre.

Shortages in the production of electronic products and components could intensify, affecting companies around the world. Mozambique, which has China as a key importer of raw materials, including coal and wood, could face challenges. The fall in demand for mineral coal, for example, could reduce the country’s revenues and affect budget execution.

China’s slowdown could be reflected in the production and commercialisation of electronic components

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In addition, pressure on raw material prices could lead to job cuts in the mining sector, increasing social and economic tensions in Mozambique. Adapting to the changes will require appropriate economic policies and strategies, such as diversifying exports and promoting other sectors of the economy to mitigate the risks and exploit the opportunities that may arise during this period of transition. In the long term, the effects of China’s economic cooling may be more pronounced. China will have to deal with an ageing population, which restricts growth potential, and adapt to a more polarised global scenario, with a growing commercial and technological gap between the United States and other major powers.

The transition to an economy more focused on services and domestic consumption will be a challenge, especially without the same growth rates that characterised previous decades.

If the country doesn’t resolve structural issues in its economy, it could face slower growth and significant challenges in guaranteeing its social and political stability. The impact of this economic transition will be felt around the world, requiring governments and companies to adjust their strategies to deal with a new global economic paradigm.

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