Will China’s economic sneeze cause the rest of the world to catch a cold?

 

BY MARVIN SISSEY

It used to be that when USA sneezed, the rest of the world caught a cold – a statement to signify the great influence of the world’s largest economy in global economic affairs. The most recent case was the 2008 recession that started in USA, and which caused shockwaves in the global economic wellbeing, resulting in a widespread global financial crisis. 

The script however seems to be changing, if ever so gradually, and this has been in the pipeline for a while; it is now becoming evident that the world no longer seems to be dancing to beat of big Uncle Sam, but to the oriental dragon tune “Made in China”.

For the past two decades, the Chinese economy has been striding like a colossus on steroids, posting double-digit growth and creating historical economic marvels that have left the rest of the world in awe. In a spate of accelerated industrialisation, the Chinese mantra of “copy like crazy then make it cheaper” has heralded a production boom that has converted China into the world’s factory. 

In 1978, two years after the death of Mao Zedong, China had the tenth largest economy in the world, with a GDP of approximately US$150 billion (Sh13.8 trillion), or six per cent of the USA’s GDP at the time. Yet by 2005, China’s economy had grown to US$2.2 trillion (Sh201.6 trillion) or 17.6 per cent of the USA’s GDP, becoming the fourth largest in the world behind the USA’s US$12.5 trillion, Japan’s US$4.5 trillion and Germany’sUS$2.4 trillion. By the end of 2014, China had leapfrogged both Germany and Japan and is now the world’s second largest economy at US $ 10.4 trillion against US’s $ 16.8 trillion representing over 14  per cent of the global economy!

 

But it’s not the GDP numbers that tell the big news. The world welcomed 2015 with two shocking China-related revelations. 

One is that, contrary to what the GDP numbers may say, China has actually grown to be the biggest economy in the world when adjusted for Purchasing Power Parity (PPP).  This is a technique used to determine the relative value of different currencies. Here is how it works. A currency is compared to the value of goods it can purchase in its own country. For instance, a shirt in China will cost much less than a shirt in the US, hence a dollar in China is much more valuable than an equivalent dollar in the US. Thus, despite the fact that, by real GDP figures, China’s economy is a clear $6.4 trillion below that of the US, when adjusted for PPP, the figures reveal that China has surpassed the US. In 2014 China reached $17.6 trillion or 16.48 per cent of the world’s purchasing-power-adjusted GDP, while the US made slightly less – 16.28 per cent or $17.4 trillion. This is huge development as it signals a real shift of economic power and probable realignment of the global geo-politics.

The second revelation is that China’s economic growth slowed to its weakest in 24 years, expanding just 7.4 per cent in 2014 compared to 7.7 per cent in 2013 – marked below the official annual growth target of 7.5 per cent. While this slowdown was expected, as the Chinese change their model from a production-based to a consumer-based economy, the shrinking economic growth is having a tailspin on the global economy. 

Part of the reason attributed to the plunging oil prices has been due to depressed demand caused by – you guessed right – the reducing appetite for oil by the Chinese. Yet, even the falling oil prices do not seem to help the global economy much. IMF has predicted that the world economy will grow by just 3.5 per cent in 2015 and by 3.7 per cent in 2016. Both estimates are down 0.3 percentage points from the group’s previous forecast, made in October after revelations of the shrinking Chinese economy were put into account. This is despite the fact that the IMF revised its estimate for the US’s economic growth to 3.6 per cent this year, up half a percentage point from the October forecast. 

 

It is official then. There is a new Sherriff in town and it has a dragon tail. Let’s all hold our collective breath and hope it doesn’t sneeze!

Sign Up