China's Slowdown: Hints of the Brink of a Global Disaster?

January 12
8:47 AM 2016

China's slowdown has caused economists and businesses alike to worry about the future. The country's successes and failures have affected the state of the world's economy before and there are some that fear that this slowdown will become a trend and create a global disaster.

The problems stem from the Chinese government's management of their economy. In order for the country's economy to grow, the government must somehow both intervene to encourage growth now, but also somehow release some control in order for the economy to continue growing in the future.

Part of this problem comes from China's source of labor slowly stagnating because there are fewer people coming into the cities to work. If the companies can't pay more people to do the work they need to grow, they will have to pay the people they already have higher wages, restricting the amount of export.

This situation of higher wages seem good to us in the West, but as The Washington Post noted, the benefits that come with higher wages don't happen over night. These higher paid workers must feel financially secure enough to spend and once that happens those workers have to get into the habit of spending more.

Once all this happens, the government has to encourage more workers by adding more higher-paying jobs, which is something the government is reluctant to do. Because if they were to do so, they need to make sure that the productivity of their workers increases by increasing production amounts or quality to make more money. And all this progress would be achieved by deregulating the economy so that businesses could start to manage themselves.

Minyuan Zhao, a management professor at Wharton, described how better guidelines can help the country transition into a consumer-based economy instead of a manufacturing-based one.

"From a managers' perspective, top questions involve industrial policies - what is allowed and what is not, who can join and who cannot. For most managers, it's better to see a clear line. For example, in the financial world, initial public offerings have been put off, put on and then off again. It's helpful to have some clarity, so you can look three to five years in the future to know what you're working towards. Clarity and certainty allow managers and investors to make long-term plans."

The effects of China's slowdown are already showing up around the world. South Africa's currency, the rand, fell on Monday when China, its largest trading partner, sold their stocks. While Saudi Arabia and Russia have been hurt from the collapse in oil prices because they export some of their oil to China.

As Paul Sheard, chief global economist of Standard & Poor's Ratings Services said about the slowdown, "A slowdown of half percentage point, or even a percentage point slowdown, is not going to have a very big impact on the U.S. economy. If you're South Africa or Peru, Chile, Colombia, Malaysia, or Thailand, then it's a different matter."

China was the saviour of the world economy in 2008. The global financial crisis had most of the Western world in a deep recession, but China's growing importing, spending, and consuming allowed the Western world to step away from the brink of a Great Recession. Now, China needs to figure out a way to make a consumer driven economy a success without hurting the growth it helped cause so many years ago. 

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