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Structural rather than cyclical factors lie at the center of China’s recent growth moderation. China’s slowdown is a result of both slower expansion of production capacity and rebalancing, which entails a shift from investment to consumption, from low-skilled to high-skilled production, and from FDI to OFDI. Furthermore, China is catching up both in quantitative and qualitative terms. Qualitatively, productivity is catching up by looking at the fact that trade balance remains unchanged and growth continuing to remain at above 7.5%. Quantitatively, income gap is closing resulting from the price effect.
China’s slowdown and rebalancing bring both opportunities and challenges for Europe and Central Asia (ECA). The impact of slowdown would hurt resource exporters in the East, while reducing competition for exporters in the West. Real depreciation and changes in relative prices entail an opportunity for European producers competing with Chinese imports. Structural rebalancing towards consumption and high skilled production will benefit both West and East, the former through increased demand of high-skilled consumption goods and the latter through demand for low-skilled labor. Rebalancing entails a particular opportunity for the EU, which presently is experiencing a weak recovery with declining unemployment and rising export opportunities brought forward by real depreciation vis-à-vis Renminbi.
However, there are further challenges that China’s slowdown entail for ECA. First, China fueled Europe with cheap products which drove down the unit import price. Therefore, China’s declining growth may decrease consumer welfare in the EU. Second, exchange rate advantage might not last, since China could at any moment increase the money supply by easing its monetary policy. Third, unskilled labor industry in the EU might not gain competitive advantage vis-à-vis China anytime soon considering an ample supply of low skilled production that could replace China, especially the South East Asian countries. Europe’s competitive advantage lies in high-skill intensive industries and it is doubtful that China’s slowdown will cure wage inequalities within the EU.
Furthermore, policy challenges need to tackle the issue around excess industrial capacity in certain industries such as steel, and the implications of slowing FDI on the manufacturing sector and trade in general.
Event summary by Uuriintuya Batsaikhan, Research Assistant