Slowing Chinese Economy Ripples across Asia, Says New ADB Study

Article | 17 March 2016

Economic growth in the People’s Republic of China has dipped to its lowest level in a quarter of a century due to demographics, deep structural shifts in the economy, weak external demand, and excess capacity in some sectors of the economy.

Last year, economic growth in the People’s Republic of China (PRC) fell to 6.9%, the first time in a quarter century that growth fell below 7%. This was the culmination of a downward drift in growth since 2011, according to the newly released ADB report, Moderating Growth and Structural Change in the People’s Republic of China: Implications for Asia and Beyond.

Why is economic growth slowing in the PRC? For one, its working-age population is declining. The economy is also changing from one that was based on factories and investment, to one that now seeks to grow based on services and consumption. This massive transition has contributed to slower growth.

The economy is partly of a victim of its own success, the report notes. As wages increased, and workers became more prosperous, Chinese factories became less competitive for low-cost manufacturing, which caused some investors to move to countries with lower-cost labor. Lackluster economic growth in the countries around the world that buy Chinese exports has also contributed to the slowdown.

The PRC has responded to the recent global financial crisis by taking a variety of measures to promote growth. These included investing in infrastructure and making it easier for people and businesses to get loans.

“The result, however, has been a substantial rise in total debt since 2008, with much channeled through the unregulated ‘shadow banking’ sector,” the report notes.

“Countries need to invest in the necessary infrastructure and undertake needed policy reforms to become attractive investment destinations.”

To address the economic vulnerabilities created by these policies, the government tightened up credit and pared back investment, which has also contributed to slowing economic growth.

Slowing Chinese economic growth will have a modest impact on major economies in Europe and North America, according to the report. Those economies have limited trade exposure to the PRC and any impact will be offset by the gains of the reduced price of oil.

In Asia, countries that export commodities to the PRC are already feeling the effects of the slowdown, but the economies with the highest overall levels of trade – Taipei,China; the Republic of Korea; Hong Kong, China; and Malaysia – will be hit the hardest, the reported concludes.

On the bright side, some Asian economies stand to benefit from the economic slowdown by moving into the areas that Chinese businesses are leaving.

“Bangladesh, for example, is already gaining market share as the PRC withdraws from the low-end segment of garment manufacturing—it is now the world’s second-largest garment exporter behind the PRC,” the report states.

The opportunities are great for both large countries like India, that aim to become new export giants, and for smaller economies like Cambodia and Myanmar, which have lower labor costs and are just beginning to enter global markets and production chains.

“Global demand for products the PRC produces in quantity—ranging from low-cost T-shirts to high-tech smartphones and computers—continues to rise,” the report states. “But with the PRC’s rising labor costs, this production will increasingly move to lower cost economies.”

Viet Nam, for example, has already become a favored location for producing mobile phones and consumer electronics—partly by attracting more foreign direct investment that might have previously gone to the PRC.

“Low wages are not sufficient to guarantee success, however,” the report warns. “Countries need to invest in the necessary infrastructure and undertake needed policy reforms to become attractive investment destinations.”