China's slowdown and what it means for the UK
20 January 2019
Monday sees the release of China's GDP figures, and they'll be even more closely watched than usual. Apple's  CEO, Tim Cook, blamed cautious Chinese consumers in part for his company's failure to sell as many iPhones as he hoped, sending share prices down around the globe. Car sales in the country, meanwhile, have dropped for the first time in two decades. On the back of such evidence, investors and policymakers are becoming increasingly jittery about the state of such a crucial engine of world growth. Measuring an economy's output is never easy but China's data comes with a bigger health warning than most. Rather than 6.5%, independent economists say the GDP figure may actually be closer to 5% - or even lower. Xiang Songzuo, a finance professor  and former chief economist of China Agriculture Bank, has claimed  that 2018 growth may have been as low as 1.7%. His online video has since been censored by authorities. The unreliability of the official figures is one reason why other indicators such as Apple's sales have the power to send shockwaves around global stock markets. It may be hard to confirm the scale of the slowdown in China but it's clear that growth has shifted down a gear. It's recently been revealed that activity in factories and workshops stalled for the first time in two years in November. The month after, exports dropped 4.4% compared to a year previously. Chinese households are clearly feeling the squeeze: retail sales are growing their slowest rate in 15 years. In part, possibly. After establishing itself as the world's workshop over the last forty years, China's found itself losing its competitive edge to the likes of the Philippines and Vietnam, where labour is even cheaper. The government decided to switch focus away from exports to growing domestic demand. However, concerns then arose about the size of China's debt pile - and the risk of bad loans. Between them, the country's households, government and corporations have debts totalling almost three times the size of GDP. A tightening of credit appears to have weighed on spending and investment. And then there's the trade war with the US. While there was an initial flurry of orders brought forward to evade tariffs, those latest export figures suggest those measures are now hurting Chinese producers. While the government has introduced measures to support the economy, most economists expect China's growth to slow further. In terms of our exports, China's is the UK's 6th largest trading partner. We sold them over PS22bn worth of our goods in 2017 - with cars, medicines and oil-based products forming the major part. Politicians' have pinned their hopes on a closer trading relationship with China in the post-Brexit era. But demand might not be quite as strong as they're anticipating . Then there's the billions of pounds Chinese companies and entrepreneurs invest in the UK every year - PS20bn in 2017 alone. Thames Water, Pizza Express and West Bromwich Albion FC are among the many which enjoy Chinese backing. That kind of investment is notoriously volatile. And let's not forget the concerns about bad loans. There's a good reason why the Bank of England's Governor Mark Carney cites China as one of the biggest risks to global financial stability. Several large banks, not least HSBC and Standard Chartered have significant exposure to that market. Since 1980, growth (if the official figures are to be believed) has averaged over 10% per year, meaning the size of the economy has surged 42-fold over that time. China's  time in the sun, its superhuman growth spurt, may be over. By 2030, economists say growth will have settled down to about a third of its current figure. But even that would be enough to ensure it overtakes the US to take pole position as the world's largest economy.
Measuring an economy's output is never easy but China's data comes with a bigger health warning than most. Rather than 6.5%, independent economists say the GDP figure may actually be closer to 5% - or even lower. Xiang Songzuo, a finance professor  and former chief economist of China Agriculture Bank, has claimed  that 2018 growth may have been as low as 1.7%. His online video has since been censored by authorities. The unreliability of the official figures is one reason why other indicators such as Apple's sales have the power to send shockwaves around global stock markets. It may be hard to confirm the scale of the slowdown in China but it's clear that growth has shifted down a gear. It's recently been revealed that activity in factories and workshops stalled for the first time in two years in November. The month after, exports dropped 4.4% compared to a year previously. Chinese households are clearly feeling the squeeze: retail sales are growing their slowest rate in 15 years.
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How concerned should they be?
In part, possibly. After establishing itself as the world's workshop over the last forty years, China's found itself losing its competitive edge to the likes of the Philippines and Vietnam, where labour is even cheaper. The government decided to switch focus away from exports to growing domestic demand. However, concerns then arose about the size of China's debt pile - and the risk of bad loans. Between them, the country's households, government and corporations have debts totalling almost three times the size of GDP. A tightening of credit appears to have weighed on spending and investment. And then there's the trade war with the US. While there was an initial flurry of orders brought forward to evade tariffs, those latest export figures suggest those measures are now hurting Chinese producers. While the government has introduced measures to support the economy, most economists expect China's growth to slow further.
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Is the slowdown intentional?
In terms of our exports, China's is the UK's 6th largest trading partner. We sold them over PS22bn worth of our goods in 2017 - with cars, medicines and oil-based products forming the major part. Politicians' have pinned their hopes on a closer trading relationship with China in the post-Brexit era. But demand might not be quite as strong as they're anticipating . Then there's the billions of pounds Chinese companies and entrepreneurs invest in the UK every year - PS20bn in 2017 alone. Thames Water, Pizza Express and West Bromwich Albion FC are among the many which enjoy Chinese backing. That kind of investment is notoriously volatile. And let's not forget the concerns about bad loans. There's a good reason why the Bank of England's Governor Mark Carney cites China as one of the biggest risks to global financial stability. Several large banks, not least HSBC and Standard Chartered have significant exposure to that market.
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How much does this matter to the UK?