Impact of slower growth in China

Rapid-Growth Markets Forecast: July 2013

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Investment and urbanization have driven China’s growth

China’s growth has averaged more than 10% a year over the past decade. This has been driven by high investment levels, particularly in infrastructure, and rapid urbanization.

If growth in China slowed to 5% by 2014, this would have serious repercussions for the other RGMs.

Investment has been an important part of China’s economic transformation, helping the country:

  • Improve infrastructure
  • Adopt new technologies
  • Boost productivity

Seeking to balance its economy

In the past decade, capital growth has accounted for over three-quarters of potential growth in the non-agricultural economy.

But this is set to slow, as China seeks to rebalance its economy away from investment and toward higher consumption.

Therefore, we expect a moderate slowing in growth to just over 6.5% over the next decade.

Pollution and rising debt levels

Pollution, water shortages and other environmental pressures could force a slowdown in urbanization and cause a fall in effective labor participation rates.

Managing financial sector reform to provide a greater range of savings instruments for households and to ease the rapid credit growth of recent years is also difficult.

Local government debt levels in China have risen in recent years and the shadow banking sector has grown rapidly, obscuring a higher level of non-performing loans.

Interbank rates rose sharply in mid-June, as Government efforts to reduce banks’ off-balance-sheet lending led to lower liquidity in money markets.

Recent deeper links with other RGMs

China’s links with other RGMs, particularly those in Africa, have rapidly increased in the past few years.

China’s imports from South Africa tripled from US$11.4b in 2010 to US$44.6b in 2012. While China’s overall trade with Ghana is much smaller, it has expanded quickly, nearly doubling over last year to US$640m.

China is not just a source of demand for Africa’s manufactured goods — it also provides a flow of FDI to many African countries.

Exports from sub-Saharan Africa to China will continue to expand rapidly (see chart below).

Exports from sub-Saharan Africa

EY - Exports from sub-Saharan Africa

Source: Oxford Economics

The moderate slowing in China’s growth will be felt across RGMs, but rising consumption as a share of GDP in China will help support demand for consumer products.

Trade partners to be impacted

We have used Oxford Economics’ Global Economic Model to estimate the effects of Chinese growth falling to 5% over the medium term.

Lower investment rates would lead to a much smaller contribution from capital. The overall level of innovation would fall, leading to even slower growth.

Lower domestic demand in China and the rest of Asia would feed through to lower demand for exports from the advanced economies. Weaker growth in China would slow its consumption of oil and other commodities.

Large commodity exporters such as South Africa and Ghana would be particularly badly hit — both by lower demand for commodities, as well as lower world prices for these commodities.

If growth in China slowed to 5% by 2014, this would have serious repercussions for the other RGMs (see table below).

Alternative GDP growth forecasts

  2012 2013 2014 2015
  RGM Forecast
China 7.8 7.5 8.0 7.9
Brazil 1.9 2.7 3.6 4.6
Russia 3.4 2.7 3.4 4.1
India 5.1 5.1 6.4 7.5
South Africa 2.5 2.0 3.6 4.0
  China slowdown
China 7.8 6.1 5.1 5.5
Brazil 1.9 2.3 1.2 2.7
Russia 3.4 2.3 1.1 2.3
India 5.1 4.9 5.3 6.4
South Africa 2.5 1.7 2.1 2.5

Source: Oxford Economics

  • Brazil: Slow growth would likely hamper efforts to improve infrastructure and investment in Brazil.
  • South Africa: Would be particularly affected by weaker demand from China and lower prices for its commodity exports.
  • India: With a large domestic market and relatively few commodities exports, India would be less affected.