China’s economy faces a 'triple threat' — and one economist says the trade war is only part of the story
China's preliminary third-quarter economic growth rate is the slowest ever forecast. And a "triple threat" of developmental factors could send the country into an even longer contraction, according to a Nomura economist.
- The three primary threats are a projected decline in the nation's population starting in 2032, a middle-income trap, and the US-China trade war.
- The factors could wipe out China's manufacturing advantage and send multinational corporations to other nations for cheap labor, Nomura's Richard Koo wrote.
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China's economy is grinding to its slowest levels of growth in decades.
The country's second-quarter growth of 6.2% was the slowest rate seen since it began reporting quarterly figures. The preliminary third-quarter estimate of 6% to 6.5% is the slowest ever forecast.
Though global stock markets have stabilized and trade talks with the US have resumed after a two-month hiatus, China's economy faces trouble from several different sectors, Nomura Research Institute chief economist Richard Koo wrote in a Wednesday report.
A large part of China's economic prowess comes from its ability to provide cheaper labor than other industrial nations at a massive scale. A "triple threat of growth-attenuating factors" could eliminate the country's manufacturing advantage and move critical foreign investment elsewhere, Koo wrote.
Here are the three main threats Koo detailed, and how they could cripple China's economy.
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The middle-income trap
As China's rapid development has raised the economic tide for its nearly 1.4 billion citizens, wages have risen in turn. This "middle-income trap" jeopardizes the country's low-cost labor market, as manufacturing interest leaves China for cheaper nations, Koo said.
At current wage levels, China's return on capital for manufacturers is nearing levels seen in emerging manufacuring nations like Vietnam and Bangladesh.The US-China trade war could exacerbate this migration and bring "huge negative implications for China."
"That, coupled with the hurdles faced by Chinese-made products in the US and other markets, suggests a meaningful decline in domestic investment is likely going forward," Koo wrote.
A soon-to-be-declining population
China Stringer Network/Reuters
Demographic data showed China's working population shrinking at the start of the 2010s, and the trend projects a net decline in population starting as soon as 2032, Koo wrote.
The combination of a middle-income trap and a looming population decline is "extremely rare" for a country of China's economic strength, the economist wrote.
"These two factors alone would pose a difficult challenge for any nation, and now China must also deal with the trade war initiated by the US president."
With just 13 years before the projected pullback begins, the country should focus on developing its own intellectual property and pivot away from serving as "the world's factory, Koo added.
The trade war
REUTERS/Fred Dufour/Pool; Alex Wong/Getty Images
The trade dispute between two of the world's economic superpowers is well into its second year, and apart from delayed tariffs and pledges to continue talks, not much progress toward a resolution has been made.
China may have been too quick to pivot from foreign investment to domestic innovation with its Made in China 2025 plan, Koo said, and the trade war could damage the manufacturing industries that drove the Chinese economy for so long.
"The Chinese economy remains heavily dependent on foreign businesses not only for manufacturing know-how but also for overseas marketing and sales," the economist wrote. "In view of that, the authorities should have treated foreign capital far better than they did."
If the country hopes to recover and keep its foreign investment intact, it should come to a trade agreement with President Trump before the 2020 US election, Koo said. If Trump loses, "it may well become impossible to separate geopolitics from trade issues."
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