China’s Slowing Growth: Three Things to Know

China’s Slowing Growth: Three Things to Know

July 18, 2013 4:19 pm (EST)

China’s Slowing Growth: Three Things to Know
Explainer Video

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.

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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