Chinese economic woes create big short-term concerns but maybe not long-term worries

Over the last several years, there has been heightened attention on the Chinese economy and for good reason, too, what with booming GDP numbers, consumer demand, and overall growth.

But as has been widely reported as recently as, say, last week and further back, too, like as in, say, last summer, it is clear that things in the Far East are not as rosy on the economic side as they once were.

There are different reasons for this, of course, including: the decision made by the Chinese government last August to devalue the Yuan, the country’s dollar, by almost two percent; a plunge in its stock market, with the Shanghai Composite Index down 10 percent last week; and lower GDP growth in the neighborhood of 7 percent, or 6.9 percent to be exact for the third quarter of 2015, which was its lowest level since the first quarter of 2009.

Data from Trading Economics said that this GDP decline was due to a slowdown in industrial output, sluggish property investment, and export contraction. What’s more, it added that from 1989-2015 China’s GDP annual growth rate had an average of 10.88 from 1989 to 2015.

Over the last few weeks, the Chinese stock market saw a dramatic drop off, coupled with ongoing concerns about its currency devaluation.

And a New York Times report observed that in recent months the Chinese government has cut interest rates and rolled out various measures geared to augment growth, with its central bank intent on putting more money into the financial system in order for banks to keep lending as a response to the stock market decline. 

The report goes on to explain that this approach presents long-term risks in that “by not shutting down struggling companies, China is putting off a much-needed shakeout. The country is also piling on debt to keep such businesses on life support. That makes it difficult to discern the underlying health of the economy.”

Josh Green, CEO of Panjiva, an online search engine with detailed information on global suppliers and manufacturers, made a logical case for China’s current economic travails.

“Clearly, the news out of China is not good,” he explained. “Weak manufacturing numbers, a drop in the stock market, and a further devaluation of the currency — all point to a faltering Chinese economy.  For years, we saw a virtuous cycle of growth centered on China.  China’s rise as a manufacturing powerhouse led to a rising standard of living for the Chinese people.  This, in turn, led to increased consumption by Chinese consumers, which drove growth both inside China and beyond its borders. Now there’s a chance we could see the exact opposite scenario.  Weakness in the Chinese economy could lead to decreased consumption by Chinese consumers, which could soften not just the Chinese economy, but also the global economy.  That’s the worst case scenario. But I suspect this is just a bump in the road, albeit a painful one.  The reports of China’s rise were always a bit exaggerated, and I believe the reports of China’s demise are now being greatly exaggerated.”

As previously noted in this space China’s unstable economy has contributed to an uneven flow of goods to and from the United States, based on trade analyst reports. The impact is significant to ocean shipping providers, they add, since China is our largest trading partner outside of the North America Free Trade Agreement (NAFTA).

What happens next in China is anybody’s guess, especially given the recent pressures it has witnessed and experienced of late. But before the global economy hits the panic button in response to these ongoing challenges, it may be best to give pause for a bit to see how things play out.