China’s Slowing Growth: Three Things to Know

July 18, 2013

China’s Slowing Growth: Three Things to Know
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China’s slowing growth carries risk for the global economy. Robert Kahn, CFR’s senior fellow for international economics, highlights three things to know about the economic challenges now facing China.

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Global Repercussions: A Chinese economic slowdown could have global consequences. "The IMF has estimated that each percentage point decline in Chinese growth reduces global growth by about one-tenth of a percentage point," says Kahn. Effects from the slowdown can already be seen in lower commodity prices and weaker global markets, he adds.

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Transitioning to a New Growth Model: In order to rebalance the economy, China must figure out a way to shift away from an export-oriented economy toward one that encourages domestic consumption and is broadly based and environmentally sustainable. "A more market-based exchange rate and a range of other structural reforms opening markets to more competition, and gradually liberalizing the capital account will be essential," Kahn argues.

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Shadow Banking Risks Affect Transition: Non-traditional mechanisms of finance, like the shadow banking sector, introduce risk to the financial reform process. Shadow banking, "while still a small share of the overall market, could be the canary in the coal mine signaling a broader problem of non-performing loans," says Kahn. Therefore, reforms are likely to be gradual.

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