Weakening Domestic Demand Pull China’s GDP Growth

China’s consistent GDP growth has been a miracle, which has remained well above the 6% mark during the last three decades. But steady declines in 2019 seem to suggest that that miracle is slowly but surely disappearing.

The fears have been aggravated after the country’s GDP growth rate touched its lowest in more than 27 years at 6% in the third quarter of 2019. This was down from 6.2% in the second quarter. The declines have come mainly on the back of contraction in the manufacturing sector and sluggish domestic consumption — which has historically served as one of the key drivers in fueling China’s perennial economic growth.

Although the rising tensions with the United States are beginning to take its toll, the non-US export growth seems to have offset any negative impact so far. But US President Trump’s aggressive stance on the crisscross between Chinese state and private sector has closed other markets as well including those in Europe, and Australia. The increasing scrutiny over Chinese investments is expected to harm China’s economic ambitions in the long run.

This is against the backdrop of industrial output falling to 17-year low in August. Furthermore, the retail sector has been undergoing a consistent decline auto sales — a key economic barometer — have fallen for more than 14 months during the quarter.

Earlier this month, the International Monetary Fund (IMF) also trimmed its 2019 forecast for China’s GDP growth down to 6.1% from 6.2% anticipating domestic demand to skid further and tensions with US over trade to get uglier.

On the other hand, the government intends to address the torpid growth with tax cuts, increased access to credit by reductions in reserve ratios for banks in an attempt to boost investment and business in the country. It has already devalued its currency to insulate exporters from the US tariffs. But as the war with the world’s largest economy drags on, it is likely to have negative impacts on the trade, overall consumer and producer sentiment, investment and limit technological transfers which will have a pronounced impact on its medium-term economic outlook.

But maintaining growth will be a challenge for Xi Jinping as assets which propelled GDP to decade highs have become liabilities for the Asian giant. Demographic crunch, losing access to foreign markets and technology as more and more nations begin to suspect Chinese investments, and the declining food, water and energy resources increase its dependence on other countries. Moreover, the ticking time-bomb of the ageing population is waiting to happen as China prepares to serve 300 million seniors in the course of the next three decades.

China is hedging its future by betting on Asia. With its trillion-dollar signature Belt and Road Initiative, it has brought its neighbours in its sphere of influence. By funding infrastructure projects with loans, China has brought many of its neighbours under its power. But that too has lost its glean over the last five years as critics allege that China is shoving debt down the poorer countries for projects they do not need and cannot afford.

But as west grows aggressive and domestic demand flattens, Beijing will have a hard time rekindling that fire that fueled its decades-long economic growth.