Stock market indices across the world plunged on Monday, August 24, in response to recent signs that China’s explosive growth was hitting the brakes. In the United States, the Dow Jones Index dropped nearly 600 points on the latest version of “Black Monday”, marking the eighth-worst point drop in the index’s history. Meanwhile, China’s Shanghai Composite Index experienced its largest one-day loss since 2007, dropping by 8.5 percent. This past week’s market slide is just the latest in China’s summer-long market decline; Chinese stocks have lost 42 percent of their value since June.
The run on China’s stocks is fueled by several signs of an overall economic slowdown in the Middle Kingdom. For years, the country powered an expansion of the global economy with its hunger for natural resources and metals to support its heavy industries, but is now transitioning towards a more service-based economy that is less reliant on imports and production growth. As a result, China’s annual growth rate – typically at over 10 percent for much of this century – has been officially revised down to seven percent for 2015, and many analysts believe the actual number will be lower still. The slowdown has global ripple effects: Countries that depend heavily on resource exports, such as Canada, Brazil, and Australia, are suffering from the resulting swoon in prices across a wide range of commodities, including oil, iron ore, and even dairy products.
In China, policymakers are also worried about the effects of the economic transition on its own citizens. The Communist Party has derived much of its popular support from the expectation among its citizens that their lives will improve as the country continues its sky-high growth. Party leaders had even encouraged citizens who historically socked away extra cash in savings to invest in the market, further marrying their fortunes to broader national trends. Now that many of these relatively new investors are feeling the pain of the market swoon, the Chinese Central Bank is experimenting with different policy tools to spur economic activity, including a rare devaluation of its currency in mid-August.
The pain of China’s economic slowdown comes against the backdrop of an aggressive anti-corruption campaign targeting top Chinese officials, driven by President Xi Jinping. While the campaign is broadly popular among citizens who have long seen local and national officials get away with bribes and favours, it is causing consternation among many party officials, who believe President Xi is using the campaign as a pretext for cleansing the party of his key rivals. Combined with the economic slowdown, the extent of corruption and political infighting that is exposed through the campaign – compounded by the recent chemical factory explosion in Tianjin and the revelation that it flouted safety regulations – threatens to undermine the popular support that the Communist Party has built over the past two decades.
- “Fading Economy and Graft Crackdown Rattle China’s Leaders”, by Michael Forsythe and Jonathan Ansfield (New York Times)
- “World Looks to China to Calm Market Rout Its Actions Started” (Bloomberg News)
- “China’s Woes Have the Whole Region on Edge”, by Nathan Vanderklippe (Globe and Mail)
- “China’s Stock Crash Highlights Underlying Credit Problems”, by Nathan Vanderklippe (Globe and Mail)
The Xi generation of leaders has lofty ambitions and resolve that are bigger and broader than their predecessors, and their objectives are even greater, so he can’t spend as much energy on specific economic issues as in the past.” – Li Daokui, Director of Center for China in the World Economy, Tsinghua University
By virtue of its sheer size and importance in today’s global economy, China’s economic slowdown will reverberate throughout the world. We’ve already seen some of the ripple effects (stock market plunges, lower commodity prices), while others may yet reveal themselves over time. Beyond the immediate economic aftershocks, one longer-term trend to monitor is the effect of this economic transition on China’s regional neighbours – as several of the world’s fastest-growing economies can be found in Southeast Asia. The catch for these countries is that much of their growth has been fuelled, or at least amplified, by China’s rise. China represents the first or second customer for most of its neighbours, accounting for a combined 15 percent of exports from fast-growing Southeast Asian economies – including the Philippines, Indonesia, Malaysia, Thailand, and Singapore. An economic slowdown in China, particularly one marked by a profound shift from heavy industry to a service-based economy, will likely also pose challenges for these other economies that have become used to rapid economic growth.
This transition may not just be economic in nature, but may also have broader political and democratic implications for the region. Whether it’s the coup d’état and recent bombing in Thailand, the surging people’s protest against corruption in Malaysia, or the pro-nationalist student movement in Taiwan, several of the region’s governments and nascent democratic systems are facing serious challenges. Until now, incumbent regimes have based their legitimacy in large part on the region’s economic rise and the promise of improved living standards for much of their populations. If and when that promise subsides, these nascent protest movements are likely to become more mainstream and significantly increase instability in the region.
Layered over the economic interconnectedness of Southeast Asian nations is a simmering military conflict over competing claims in the South China Sea (which we touched on in a previous PineTreeRepublic post here). This unresolved conflict raises the stakes of economic and political instability; a tempting response for political leaders facing legitimacy challenges is to ratchet up nationalist sentiment by focusing on a perceived external enemy. This applies to China’s neighbours as well as to China itself, as it has reportedly just completed building artificial islands to claim sovereignty over the Sea.
Southeast Asia is an incredibly complex region with overlapping nationalist tensions born from centuries of wars and colonial experiences. In recent decades, a fragile peace emerged in conjunction with unparalleled economic growth, which prevented those tensions to fester into prolonged armed conflict – but this emerging economic transition may test that uneasy regional truce. And if economic instability does boil over into political and economic instability, it will assuredly have ripple effects for the United States and other Western nations who have an interest in influencing the geopolitics of the region.
What do you think will be the most significant effect of China’s economic slowdown on international relations?