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Study notes

How might a Chinese economic slowdown affect the UK economy?

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

There is mounting evidence that economic growth in China is slowing down. Indeed the IMF cited this development as one of the major external risks for the global economy in 2019. The IMF projects global growth at 3.5 percent in 2019 and 3.6 percent in 2020 and argues that a cyclical slowdown in China will act as a drag for much of the world economy.

China growth rate at its lowest since 1990

Real GDP in China grew by just 6.6 percent in 2018, the weakest growth since 1990. Everything is relative of course. Growth in excess of 6 percent still places China among the fastest-growing nations in the world. Any analysis of the likely impact of a Chinese slowdown on the UK and other countries needs to be prefaced with a health warning. Few market economists place much reliance on Chinese economic statistics. Some think that China might be growing as slowly as 2 percent at the moment. This would be recession - Chinese style

In response, the Chinese government is attempt to re-boot their infrastructure spending to kick-start their cooling economy. Monetary policy is also being used to support lending. The required cash to deposits ratio for banks has been relaxed and the FT reports that China’s central bank injected a record $84bn into the country’s banking system in a move to increase liquidity to support aggregate demand.

It is worth noting that China is a considerably larger economy than it was five, ten or twenty years ago. Annual growth of 6 percent probably adds as much extra (incremental) demand to the world economy as the super-charged growth of ten per cent a decade ago.

The World Economy Year Ahead 2019

That said, there are several ways in which a period of slower Chinese expansion could impact on the UK:

  1. Weaker global economic growth including the impact on advanced countries such as the USA, Japan and the Euro Zone with whom the UK does most of her trade. If slower growth hurts corporate profits, then global share markets may see a decline which the hits the value of stocks held by invidious investors and occupational pension funds.
  2. A softening of world commodity prices. China is the dominant buyer of many commodities, so a significant drop in demand is likely to cause lower prices for commodities such as oil and copper which in turn could reduce cost-push inflationary pressures in the UK. Lower inflation would be good news for people whose pay is barely rising year on year. It might also persuade the Bank of England to keep their base interest rate on hold at 0.75% for some time to come.
  3. There could also be a direct effect on UK trade with China. Whilst exports from the UK to China are still relatively small compared with those to the EU (the UK's largest trading partner). In 2017, UK exports to China were worth £22.3 billion; imports from China were £45.2 billion, resulting in a trade deficit of -£22.9 billion. Overall, China accounted for 3.6% of UK exports and 7.0% of all UK imports.
  4. Many UK businesses have important investment relationships in China. A good example is Jaguar Land Rover. Weaker growth in China might reduce the profits that UK firms make in that country and therefore reduce the inflow of profit and dividends that come back to the UK
  5. Chinese tourism and inflows of students - a slowdown in China might lead to a drop in the number of Chinese tourists coming to the UK and students applying here for full-time study.

George Magnus and the long term threat to Chinese growth:

The current slowdown could be a precursor to a significant downshift in Chinese growth. The veteran China expert George Magnus has argued recently that “China’s problem is chronic premature ageing as consequence of 1970s policies and chronic gender imbalance as consequence of their one child policy.” Just this week, the Chinese Bureau of Statistics recently announced that China saw just over 15 million births in 2018 — 2 million fewer than the year before.

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