After three decades of unprecedented economic growth, China must manage a volatile stock market, a slowing economy, and increasing criticism both at home and abroad at its handling of the economic crisis.
Here are the four things you need to know about the current situation:
1. The slowdown in China’s economic growth has long been expected. Since the mid-1980s, China has been the world’s fastest growing economy, with growth rates averaging over 10 percent. This year, China’s economy has grown at only 7 percent—still three times the growth rate of the U.S. economy. This is mainly due to a decreased demand for Chinese goods.
2. The stock market crash is a symptom of the downturn – not the cause of it. China’s stock market is a small part of the larger Chinese economy. Only a third of China’s GDP is available for trading—as opposed to 100 percent in most western countries—and only 2 percent of Chinese stocks are owned by foreigners. Many U.S. businesses in China have been unaffected by the market turmoil. Apple, for example, has seen strong growth in China throughout the crisis, according to CEO Tim Cook.
3. So far, Beijing has been unable to successfully manage the crisis. Rather than address systemic issues, Beijing has only treated the symptoms of the problem by lowering interest rates and halting IPOs. In August, the Chinese government devalued the Yuan by almost 2 percent, a move some experts characterized as an attempt to boost Chinese exports and prop up the economy.
4. There is no real consensus on China’s near-term economic outlook. As far as China’s future is concerned, analysts are divided. Some say China is on the verge of collapse. Others say Beijing has the situation under control. Although IMF president Christine Lagarde has publicly expressed her optimism that China will weather the storm, the panic—and the government’s inability to handle it—have led to serious questions over whether the economy is in a far worse state than Beijing is willing to admit.
Alexandra Viers is an analyst with The Cipher Brief.
