Why is China's economic growth slowing?
1) growth fueled by importing production technology will eventually come to an end,
2) there may be the need for the development of better institutions to support the right innovate business development and growth
3) China had a brilliant policy of fiscal spending on infrastructure construction that avoided many of the ill effects of the great recession but may have over anticipated the current rate of urbanization (rural to urban migration) ahead of job creation that is affected by#4
4) there is currently economic uncertainty in the rest of the world that may be part of a recovery slowdown, result is a reduction in the previously insatiable appetite for products made in China.
Most developing countries economic growth is supported by importing the technology of production from higher GDP per cap countries. This includes China. Eventually as countries such as China "catch" up in GDP per cap, then the innovative frontier will potentially switch and in the future just as there was a period when much of the world's technological innovation in production was coming from rising economies (Asian Tigers) Japan, Taiwan, S. Korea, and Hong Kong, the innovation may eventually come from China. However the GDP growth of developed nations on the edge of the innovative frontier is much slower than the potential growth in a country that is importing production technology.
Thus as China approaches higher GDP per cap growth will slow to the rate of countries on the frontier. There is the potential that there may be some future innovation that is not a bubble and is faster than the current rate of developed country rate of production technology innovation. However I would strongly expert this to not be the case, in particular past growth in China during the importation/adoption of production technology will be expected to be very different than growth after GDP per cap is close to that of developed nations (this may be the next big short in a few more years, probably China has not yet reached this GDP per cap level sufficient for such a permanent slowing).
There are also currently limits on China's potential growth due to institutional constrains (poor long term business and innovation environment). The reward incentives for innovation are limited by the lack of strong labor property laws and the prevalence of bureaucratic friction and extraction corruption. In more free flowing capitalism the aggregate supply and aggregate demand responds more quickly to price and quantity fluctuations that indicate shifts in supply or demand, when markets are centrally controlled or regulated or prescribed, the speed of the response is slower and less efficient. Further less restricted (though not necessarily less regulated) capital markets allow for lower financing cost (more likely that the business will be profitable) and for the discovery and development of Small and medium-sized enterprise business models with potential that are often overlooked in an industry where the preference is to over lend to public-private joint ventures that carry the tacit fail safe insurance of government backing. Continued growth could be helped by institutional changes.
There is a current over-development of urban infrastructure and housing construction ahead of urban job creation and continued rural to urban migration. The urbanization growth model that China has been following, has reached a hiccup, where urban job creation needs to catch up with available infrastructure. The most recent run of this was the government's recession avoidance policy of fiscal spending on infrastructure construction during what was the Great Recession in the rest of the world. To a large extent this was able at the time to avoid the effects of the Great Recession felt elsewhere. However some of this job creation constructed urban infrastructure and housing that got ahead of the rest of the urban manufacturing job creation and thus much of this new infrastructure remains unoccupied / uninhabited.
Unfortunately this may be coming at the same time as international economic uncertainty and potentially a recovery slow down in the rest of the world. Much of China's prior growth was fueled by exports, and this avenue of seemingly infinite growth may now be tempered. Thus both due to the great recession and now due to a slowing of the recovery elsewhere, the job creation by the insatiable increase in consumption of goods made in China is also slowing.
This is further tied to many other discussion on the global economic outlook in 2016:
- Erik Hille's answer to Are we headed for a recession in the United States in 2016?
- Erik Hille's answer to Why is it thought that Chinese economic growth is lower than official figures? The figure put out by the Chinese government is 6.9%, but many economists estimate a figure a few percentage points below that. Where does this figure come from?
- Erik Hille's answer to How likely is it that the Great Recession of 2007-2009 will be renamed 'Great Recession 1' with a 'Great Recession 2' coming soon? [Feb 2016]
- Why do so many people think the China economy will collapse?
Why China Rattles the World
A Stock Market SlideIgnites Broader Fears
It was rocky start to the new year, as investors worried about the health of China's economy. In the first week of 2016, steep losses in the Chinese market triggered a circuit breaker, shutting down trading early and sparking a global rout. The situation has started to stabilize, with Chinese stocks edging higher of late.