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Rebalancing of China Poised to Shock Emerging Economies
Another Financial Threat
Rebalancing of China Poised to Shock Emerging Economies
  • By matthew
  • February 4, 2014, 07:57
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Shanghai’s Pudong district, home to the Lujiazui Finance and Trade Zone, has been built up in just 20 years. (Photo by Yhz1221 via Wikimedia Commons)
Shanghai’s Pudong district, home to the Lujiazui Finance and Trade Zone, has been built up in just 20 years. (Photo by Yhz1221 via Wikimedia Commons)


The slowdown of the Chinese economy is casting a cloud over emerging economies, which are already suffering from the tapering of quantitative easing by the US Federal Reserve. China is the world’s largest consumer market, and its slowdown is sure to affect the exports from emerging countries, which is one of the few options for economic revitalization on their part. For example, a single percentage point drop in China’s economic growth rate is estimated to drag down Korea’s exports to China by 1.3 percentage points. 

Economists are pointing out that the Xi Jinping administration’s economic reform has long been expected to cut the country’s growth rate, but its impact could be larger than expected if the effects of tapering are added to it. Nevertheless, their consensus is that the Chinese economy is unlikely to have a hard landing in the near future. “The slowdown is a natural consequence following the transition to a service and domestic consumption-centered economy, and will not damage its growth itself,” said one of them, adding, “In addition, the Chinese government will not sit still for the slowdown.”

These days, various economic indices of China are showing a downward trend. For instance, its exports for December 2013 increased just 4.3 percent from a year earlier, which is much lower than the previous month’s 12.7%. The labor costs are on the rise in China nowadays and the yuan is appreciating, to affect its export competitiveness. Besides, some experts have mentioned that the statistical data itself has been overstated. 

The purchasing managers’ index (PMI) in the non-manufacturing sector is showing negative signs, too. The indices dipped below 50 in the hotel, lease, commercial service, maritime transport, real estate, and public service segments. Meanwhile, those in the railway and construction sectors, which are led by the government, remained over 60, to mirror the high expectations of infrastructure construction.

Economists are estimating China’s annual growth rate for 2014 at between 7.0 and 7.5 percent. Although some of them are commenting that the percentage could go over last year’s 7.7 percent thanks to the increase in domestic consumption, it seems that the Xi Jinping government does not welcome such a high figure. 

It has emphasized the role of the market during the course of economic reform, but is expected to intervene in it if the national economy slows down at a faster pace than expected. Prime Minister Li Keqiang mentioned last month that the minimum economic growth rate for stable employment would be 7.2 percent.

The strong reform drive is likely to have a direct impact on emerging economies around the world, particularly on those exporting raw materials to China. “If the Chinese government launches an industrial restructuring program to handle the overproduction matter, raw material exporters such as Brazil, Australia, and South Africa will take a substantial hit,” the Hong Kong South China Morning Post reported. China currently consumes more than 60 percent of global iron ore production. 

Financial reform by the Chinese government is another unfavorable factor against emerging economies in that Chinese funds, which have capitalized on a low interest rate, will be shrunk in that case. Experts remark that the Chinese government will come up with a financial bailout as a countermeasure against shadow banking, which, in turn, will pose some burden on commercial banks in China.