How China’s Economic Slowdown Could Be Bad for the Rest of the World

It is easy to become quite cavalier when analyzing economic performance of various countries to think of them as existing in bubbles. However, as anyone with a moderate level of economic understanding and experience reading markets knows, trade is a major factor of almost every healthy economy in the world. That means that every nation’s fortunes are interconnected.  When that nation happens to be one with an economy as large as China’s, it can have ripple effects around the world.

It is easy to become quite cavalier when analyzing economic performance of various countries to think of them as existing in bubbles. However, as anyone with a moderate level of economic understanding and experience reading markets knows, trade is a major factor of almost every healthy economy in the world. That means that every nation’s fortunes are interconnected.  When that nation happens to be one with an economy as large as China’s, it can have ripple effects around the world.

According to a report by Business Insider, China’s gross domestic product (GDP) growth has slowed from 10.4 percent per year in 2011 to 7.4 percent as of 2014. According to the World Bank, this number will continue to diminish to below 7 percent by the end of 2017.

Much of this growth has relied on the import of commodities from dozens of nations around the world. In fact, imports into China increased by 900 percent between 2000 and 2014. As the Chinese economy cools, so too does the demand for those imported commodities. Thus, the economies of the supplying nations also feel the loss of Chinese prosperity.

China’s sphere of trade influence is vast. The nation managed to orchestrate very important trade agreements with a number of Latin American nations, giving it considerable sway in the region. China’s need for aluminum and platinum made it a chief trade partner with a number of Sub-Saharan African countries. In fact, China has become the leading investor in developing the long-impoverished Sub-Saharan region, in large part to support its own industrialization needs. Even Australia counts China as its largest trading partner. In total, 43 countries counted China as their largest export market in 2014.

Unfortunately, the Chinese slowdown means much of that buying capacity has disappeared. South African imports declined 32 percent in 2014, while Brazil’s dropped by 12 percent and Australia’s by 11.4 percent. This, in turn, created slowdowns in those economies. In fact, Brazil only managed to squeeze out growth of an almost unmentionable 0.1 percent in 2014.

Unfortunately, for these commodities based trading partners, China has begun a transition to true modernization. Most modern nations have economies focused more on consumption and services rather than manufacturing. Thus, as the industrial sector contracts, these nations will have to either adapt along with China or reset their trade philosophies and seek more lucrative new markets.