China, or in its correct form, the Peoples Republic of China (PRC), is known to be the world’s most populous country. In 2013 the World Bank quoted the population as being somewhere in the region of 1.35 billion people. With such a large population, whichever way their economy swings it will inevitably be under the watchful eye of other global economic regions, notably the U.S and here in Europe. Currently sitting as the second largest economy in the world, behind the U.S, it is estimated that by the end of 2014 it will have overtaken the U.S as the largest economic power in the world, using the purchasing power parity method (16.48% World GDP vs 16.28%).
In recent decades China has witnessed outstanding economic growth that has brought nearly 500million people out of poverty. However, the question the nation must now ask themselves is whether this could all be about to change, having witnessed on Friday that the Chinese Central Bank had decided to cut its interest rates in a rather unexpected fashion. It is thought that the Chinese economy is heading for its slowest expansion in nearly a quarter of a century and this will surely only add fuel to that fire. This is the first interest rate cut in more than two years, seen to be a result of stalling factory production, which directly affects export numbers, and a slowing down in property market. Sound familiar?
The Chinese domestic economy in recent years has been growing its GDP at an average rate of over 10% per annum and this year, while still growing, it is estimated to fall short of that mark and finish closer to 7%. The effects of this are obviously unknown, but with so much scope and daily reporting focusing so heavily on the Asian superpower, it certainly will not instil the level of confidence previously held in the country. What is quite possible is that we may see a domino effect occur in the domestic economy. In this scenario, with growth rates falling, international investors may decide to invest elsewhere or simply withdraw their deposits from China’s already heavily leveraged banks. In turn this may spark further withdrawals reducing confidence further and so on. This domino effect has been seen many times before on the global forefront and is something Chinese officials must surely be aware of. It is utterly imperative that fiscal stimulus policies are put in place to stabilise an economy and banking sector serving over 1.3Bn people in its domestic market alone. This domino effect could potentially reach further onto a more international level. China currently own circa 8% of all U.S public debt which nominally is estimated at $1.2tn. Should the domestic economy begin to falter, pressures could be mounted on other international superpowers to come to China’s aid, thus asking questions of their own economies.
The PBOC (Peoples Bank of China) cutting its interest rate is by no means a call for international stock markets to go into meltdown and for worldwide panic to set in. It does however serve as a reminder that China’s massive growth in recent decades will eventually plateau, in line with the boom-bust economic cycle. That is perfectly normal, however the fiscal policies to stabilise the aforementioned economy must be introduced to deal with any shocks to the system. The crisis in Ireland that unfolded in 2008 should act as a reminder as to the consequences of not taking note of economic signals.
– Tim Courtney