- April 11, 2014
- Posted by: essay
- Category: Term paper writing
Generally, the GDP experiences pressure through the overall reduction in investments, which are only partially compensated by the increase in local households’ expenditures. The data of the Ministry of Commerce of the People’s Republic of China (2012) show that the volume of foreign direct investment in the Chinese economy decreased by 6.8% in September 2012 compared to September of the previous year ”“ down to $8.43 billion, while in September 2011 there was marked a record value in this indicator for this month making $9.05 billion. Monthly maximum was observed in December 2010 at the level of $14 billion, and the highest annual value was fixed by the results of 2011 fiscal year – $ 116 billion. On a whole, from January to September 2012, the investment volume fell by 3.8%, down to $ 83.4 billion in annual terms (Ministry of Commerce People’s Republic of China, 2012). Bloomberg agency reports that the volume of foreign investment in the Chinese economy has been falling down for already tenth month out of the latest eleven, as the companies are now limiting their spending on the background of the growth rates recession (Zhou, 2012). According to the agency reporters, the reduction in foreign investment indicates investors’ concerns that the slowdown of the economy of the PRC, the most populous country in the world, would have a negative impact on global sales and profitability.
The country also shows the sudden growth of inflation. As far back as six months ago, the inflation in China made more than 5%, which was considered to be an unacceptably high level (Gang, 2012). However, since that time, the Chinese government seemed to have managed to stop the overheating of the economy. Therefore, in recent months, country’s authorities have mainly been concerned about not allowing the factually inevitable economic slowdown to grow into significant one. However, in August 2012, the consumer prices rose by 2% in annual terms, while back in July, the same figure was at the level of 1.8%. In this case, food prices were the engine, and taking into account the unfavourable weather conditions in many regions of the world, there are reasons to believe that food prices will further continue to rise, and, respectively, so will the inflation in China (The Guardian, 2012).
In this situation, analysts assume that the further slowdown in the Chinese economy seems indeed highly probable. Therefore, for many market players the major question is how strong the deceleration of the economic growth in China would be, or in other words, whether it would be so significant that it would have a negative impact on the growth of global GDP.
In particular, the sharp decline in Chinese investments is only one of the risks, according to report on five systemic economies’ performance analyzed by the IMF (2012). IMF experts Teja et al. (2012) estimated the potential impact of the reduction in country’s capital on China’s trade partners at 1%. Basing on this forecast, The Economist (2012) prognosing the two possible scenarios: soft deceleration (the reduction of Chinese investments in other countries by 2%) and severe (reduction by 3.9% or at the level of 2008).
According to The Economist (2012), the severe slowdown will mainly hit South Korea and put an end to the growth of Taiwan. At the same time, the projected negative scenario is not to have a very strong impact on Brazil and Australia, which may be explained by the possible weakening of the national currencies that will soften the stroke. The Economist’s analysts also predict that the Chinese slowdown will negatively influence the global stock markets. Though some countries may feel this slowdown indirectly: thus, for instance, Germany will lose quite a large portion of exports not only to China, but also to countries which sell a lot to China (The Economist, 2012).
As for the continued growth of inflation, it may lead to the need for restraining the growth of lending volumes by Chinese banks as well as for reducing the flow of money in households, which respectively, would reduce the consumption and lead to the further slowdown of the economy. However, there is also a point of view that China’s inflation growth rates are not that significative, and by now the figures are not that significant to start greatly adjusting other parameters, and that overall, China’s GDP growth slowdown can be scaring for everyone else, except China itself (Gang, 2012). Thus, Gang (2012) reckons that the reduction in the rate of China’s economy growth is far more dangerous for energy-exporting countries, and the first states to experience its consequences are Russia, Brazil, South Africa, Australia, and Indonesia. According to the International Energy Agency, in 2011, China consumed 9.9 million barrels of oil per day (The IMF, 2012).