The impact of a slower China

Mon, 10 Jun Pre-Open

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After reporting double digit growth for three decades, China's growth rate has gradually declined. In 2012, the dragon economy's GDP growth stood at 7.8%, the slowest in about thirteen years. During the first quarter of 2013, the same declined to 7.7%. The country is set to report the figure for the next quarter in the coming week. However, as per economists' forecasts, the weak data in April and poor factory activity in May is likely to push the figure close to the 7% mark. The country's leaders are targeting for a 7.5% growth rate for the full year.

China's new leaders - President Xi Jinping and Premier Li Keqiang - had stated few months ago that the country should not be blindly chasing growth. With this, there has been a major shift in strategy. From being an export and investment oriented country, the focus is not on increasing consumption and the contribution of the service industry.

Nevertheless, with growth rates coming down discussions related to announcement of new stimulus packages are making rounds again. While the earlier Chinese leaders used stimuli to fuel growth, that may no longer be the case. It is believed that the country's new leaders - who were handed over the mantle in March this year - seem to have a higher tolerance when it comes to the slowdown in economy. As per certain economists, earlier China's tolerance levels in terms of GDP growth was in the range of 7.5% to 8%. As and when growth figures slipped closer or below this range, stimulus packages were announced to revive growth rate. But as per government economists, the same figure for the new leaders seems to be closer to 7%.

The Chinese policy makers have also indicated that government led investments are no longer a focus for China's overall growth strategy. Premier Li had stated that China must rely on market mechanisms to aid growth. This will not just impact China's own growth rate, but would also impact other parts of the world.

Rapid urbanization, for instance, made the China a commodity hungry nation over the past few decades. To put things in perspective, China consumes nearly 40% of the world's steel, aluminium and copper. With less focus on investment led growth, the global demand for commodities would take a substantial hit especially considering that there has been a substantial amount of capacity creation in the recent past. All this only points towards one thing - lower prices for commodities. Not to mention the impact dragon nation's slowdown would have directly on the gross domestic product (GDP) of some of its trading partners. China formed a big chunk of exports of many of the Asian partners: Taiwan - 30%, Korea - 25%, Australia - 30%. As per the IMF, a 1% fall in China's investment could reduce the trading partners' GDP by upto 1%.

Investors will therefore have to look at the global slowdown keeping China in perspective.