China – the world’s second largest economy – is undergoing a major political revolution coupled with financial slow down. According to experts, which include prominent figures such as Ken Rogoff (former IMF chief economist), the Chinese economy is slowing down to an even greater extenet than the official figures show. From double digit growth, the Chinese government now expects the growth to be just around 6.5 % to 7%.
Reasons behind the slowdown of the Chinese economy
To begin with, China has long been a manufacturing and export-driven economy. This economic model went in its favor, due to its large population, which readily provided cheap labor. The ‘one-child policy’ implemented by the Chinese government, on the other hand, not only helped in controlling the country’s population, but also meant there were less people to join the labor force. Additionally, the new generation of Chinese are no longer interested in having low-paid manual jobs. And as Chinese authorities are trying to convert their economy to a service based and domestically driven one, this has resulted in a major decline in its exports activities.
The second key reason for the woeful condition of the Chinese economy is its overvalued currency. It’s been a long time since economists warned about the excessive money printing and debt creation by the People’s Bank of China (PBOC). Though this strategy of the Chinese government initially boosted the money supply in the economy by around 75% and also increased its total social financing (TSF), April 2016 saw a major weakening in the TSF. Weak TSF along with a weak Purchasing Managers’ Index (PMI) and investment growth is yet another reason for China’s bad economic condition.
Lastly, in response to the 2008 financial crisis, the Chinese government spent around $586 billion. In 2014, the cost of borrowing was reduced in order to stimulate the economy at the local level and the exchange rate of its currency was reduced three times within a week in 2015. Though all of these measures were specifically taken to support the economy, in the long run these policies resulted in bad assets and unsustainable debts.
Is China the reason for plunging oil prices?
There is no denying that any changes in the Chinese economy are sure to have an effect on the global economic scenario as well. As of late, many have held the Chinese economy responsible for the plunging of oil prices globally. But a deeper analysis will explain the simple fact that, since China did not drive the global oil market in 2015, it surely has no major role in the drop in oil prices this year.
The logical reason for plunging oil prices is that the market is oversupplied with crude oil, as Russia and the OPEC countries are aggressively pumping their oil fields. Add to this the lifting of sanctions on Iran, which is going to further flood the market with many more barrels of crude oil.
In spite of the slowdown in the economy, crude oil consumption in China has not been reduced. Rather, it has grown with the increase in the sale of passenger cars. With tax cuts on Chinese cars, the high demand for crude oil from China should be regarded as a positive sign in the global oil market.
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