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What’s Causing China’s Economic Slowdown

And How Beijing Will Respond

A production line in a factory in Huzhou, Zhejiang province, China, January 2019 REUTERS

Last year, China experienced its slowest economic growth in nearly three decades. The trouble seemed to start in the fall. Wage growth has cooled. Surveys show that companies in the manufacturing sector have begun shedding jobs. And imports are down, hurting other major exporting economies.

There’s more than one reason for the slowdown. A rapidly aging population, a falling birth rate, a tightening Federal Reserve, and a slowing global economy have combined to put the brakes on China’s economy. Yet Beijing cannot risk a recession. The Chinese government will not allow growth to slow significantly, even if that means storing up problems for the future.

PERFECT STORM

China’s problems stem primarily from decisions made years—in some case, decades—ago. In the past, China benefitted from a growing workforce, which boosted GDP both by adding workers and because younger workers tend to be more productive than older ones. But around 2012, the working-age population began to shrink, the inevitable result of the one child policy, which was enacted in 1979. The decline in growth rates owes in part to this demographic winnowing.

Rising wages pose another problem. Chinese wages now match or exceed those of most other emerging market economies, making China a less attractive destination for foreign companies. On top of that, high living costs and administrative burdens have reduced the flood of rural peasants into cities to a trickle. The average disposable rural income in 2018 was 14,617 Yuan a year, low enough to make moving to the city prohibitive when the average price of an apartment in urban areas is now 14,678 Yuan per square meter.

Forces that drove Chinese growth in recent years are withering. China once relied on a trade surplus to boost growth, but today the country’s account is effectively balanced. Investment in fixed assets, such as factories, machinery, offices, and apartment buildings, was traditionally a major source of growth. But such investment fell as a share of GDP from 82 percent in 2016 to 71 percent in 2018, and a further

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