China’s economic downturn and its implications for the world

The year 2012 marked the beginning of China’s new economic reforms, coinciding with a new leadership era. Prior to 2012, China had seen unprecedented economic growth, particularly from the exports of manufactured goods. Until recently, the comparative advantage that the country had in manufacturing - at times based on cheap labour and production costs - had a large part in creating a production surplus in order to supply overseas markets with ‘Made in China’ products. China’s economy has constantly gone through institutional reforms and structural changes, first to fit domestic needs, and second, to better integrate with the world economy.

China’s current economic situation (due to economic reforms, which are more centred on internal consumption rather than exports) has consequences beyond its borders, as the country’s economy is more and more integrated with the world economy in terms of both trade and investments. While China’s import of resources during a decade or two contributed to a global commodity price boom, its current slackening economy and declining mineral imports - not to forget the devaluations of the renminbi - have consequences for resource-rich countries which heavily export to China. These consequences can be seen in terms of economic slowdown, unemployment, decline of currency value and other issues. However these shifts in policy and economic overture have had implications at home, as well asforcing new choices abroad largely through their impact on the global commodity market. This piece analyses China’s current economic situation, its implications for the world commodity prices drop, and effect on the economies of Brazil, South Africa, Australia and Canada.

CHINA’S CURRENT ECONOMIC SITUATION

While the current economic reforms were intended to focus more on internal consumption rather than on exports of manufactured goods, this result has not been promising so far. At most, the shift has been incremental.

First of all, while the reforms implied less resource import, China has continued to show a growing interest in importing coal, copper, steel and other mineral products which are crucial to the country’s urbanisation. This continues to be a main priority for China; while its coastal cities have developed, the country’s officials aim at bridging the gap between urban and rural areas through massive inland infrastructure development projects. Such projects require a huge quantity of mineral and metal products. The modernisation of the railway system in China alone requires considerable amounts of steel. In order to secure strategic mineral products central to green technologies in the long run, China has imported significant quantities of rare-earths from abroad; which in conjunction with its domestic supplies makes the country one of the world’s largest reserves of rare mineral products.

Secondly, China has recently devalued its currency in order to boost its exports, which have been the backbone of its economy. Such devaluation of the renminbi is strategic, as it contributes to reactivate China’s exports and economic growth. While China’s economic growth has stood at over 10% p.a. for the past three decades, today it is between 7% and 6%. This raises concerns among Chinese officials and, as we have seen, among capital and commodity markets abroad.

But such a 360° turn in China’s economy shows the limitations of the economic reforms. Of course such a change has implications for both China’s domestic economy, and the world economy. If Chinese citizens dreamed of these reforms being politically necessary, and making a huge contribution to the life of the average Chinese citizen and the local economy, their dreams are currently on hold. While other countries were hoping to face less competition from Chinese exports - thereby enabling their manufacturing industries to re-emerge, the situation is not likely to change. The impacts of China’s current economic situation can be felt beyond Chinese shores.

CHINA’S RESOURCE IMPORTS: IMPLICATIONS ON WORLD COMMODITY PRICES

For the past three decades, while China’s economic growth relied heavily on exports of manufactured goods, modernisation and industrialisation in the countryfocused mainly on imports of mineral resources from abroad, even though the country is resource-rich. China’s imports of coal, copper and steel among other mineral resources have made the country the largest importer of resources crucial to its economy. Countries like Brazil, South Africa, Australia, Canada, Zambia, Angola and Sudan - among others - have attracted Chinese mining and oil companies, which contribute to securing energy resources through the official Chinese policy of resource-security. In southeast Asia, the same companies have ventured to secure coal and copper deposits too.

The same countries in recent years have benefited from China’s interest in their resource sectors, through huge Chinese investments as well as infrastructure development via the building of refineries, pipelines and so forth. Such investments boosted the GDP of a number of countries, which for the past years have been among the world’s most stable or fastest economies. But China’s economic reforms, undertaken a few years ago, and which focus less on imports of resource commodities and concentrate more on the development of its service sector and service imports, constitute a changing trend for the resources market. China increasingly imports less resources, leading to a decline in world commodity prices, particularly in the mining industry. Such price drops have already been felt in Brazil, South Africa, Australia and Canada.

BRAZIL

Brazil enjoyed a boom in the resources trade in the past decade. The country’s economic growth has mainly relied on resource exports. In 2012, resource exports represented 14% of Brazil’s GDP. While the country’s economy has grown significantly, thanks to the rise of world commodity prices and growing interest from China to import mineral products from overseas, Brazil has not managed to diversify and focus on other key sectors of its economy. Therefore the current decline of the world commodity market, and China’s economic slowdown, alongside Brazilian officials’ lack of long-term prospective goals to focus on other sectors of the economy (e.g. agriculture, manufacturing, and services) also very important; and contributed to Brazil’s current economic crisis.

Reliance on the Chinese market for resource exports has long-term consequences for Brazil’s economy. When the Chinese economy slows down due to economic reforms - which are aimed at boosting internal consumption, importing less resources and devaluing of the yuan, among other things - it is likely that the economies of resource-rich countries like Brazil will be vulnerable. China’s downturn demand for resources has contributed to a drop in world commodity prices, which undoubtedly affects Brazil’s mineral exports and currency value, and very likely the viability of some of its resource development projects.

SOUTH AFRICA

South Africa’s economy strongly relies on the mining sector. But recently the sector has experienced strikes, leading to tensions between mining unions, companies and the state. China is one of the major importers of mineral products from South Africa. Chinese companies, including state-owned, private and small-and-medium-sized enterprises, are invested in the South African mining industry. However, China’s cheap imports of mineral products from South Africa have recently caused resentment in South African unions who asked the government to impose higher duties on these imports. China’s reforms to have less resource imports and the drop of global commodity prices have had an impact on South Africa’s mining industry.

Several mining contracts have been cancelled, leading to the suppression of jobs for thousands of miners across the country. For instance, Lonmin platinum mining has already announced it will cut 6,000 jobs following the suppression of mining contracts and mine exploitation. The long crisis in the South African mining sector between 2011 and 2014 did not make things easy for mining companies, which produced less, had to pay higher salaries and face increasing electricity costs. This all compounded the decrease in South Africa’s mining industry. While mining unions are organising themselves to counter the decisions of mining companies to cut jobs, the companies state that restructuring is necessary in order to keep their businesses running. Yet, in the current deteriorating situation of the South African economy, it seems that more re-adjustments will be necessary to save the mining industry and the overall economy.

AUSTRALIA

Richly-endowed with mineral resources, Australia is a major resource exporter to China. Mining accounts for 10% of Australia’s GDP. The country’s mineral resource production satisfied China’s needs for a decade. For instance, iron ore exports to China between 2013 and 2014 accounted for 17% of Australia’s earnings. Since 2004, China has been Australia’s major export market for iron ore. Exports to China helped Australia suffer less during the 2008 economic crisis, compared to the degree at which it hit most developed countries. But China’s decreasing resource imports have seen Australia’s share of resource exports to China decline. The country’s terms of trade have also declined, due to the coal and iron ore price drops.

Australia has strategies to diversify its economy, and until recently, its trade with China was heavily dependent on mineral resources. To achieve diversification, the country relies on its agriculture and service sectors. Besides, Australia has a sovereign-wealth fund which could mitigate its current crisis situation.

CANADA

Canada is the world’s 5th largest oil producer. While the country enjoyed the oil price boom for a long period, the current oil price drop is not without consequences for the overall economy. The United States has been the major importer, taking 24% of Canada’s oil imports. But with domestic U.S. production rising, Canadian interests are eyeing the Asian market, China in particular, which currently only receives 2% of Canada’s oil production and may increase this.

The diversification of oil export-markets for Canada is crucial if the country does not want to be stranded with the U.S. market alone. Surprisingly, U.S. demand for Canada’s oil is currently low due to its over production. Besides, Canada’s lack of infrastructure to export its oil to other regions of the world and the current oil price drop do not favour Canada’s oil sector. While the oil industry used to hire many people, today jobs are being cut. In 2015 alone, Alberta’s oil and gas sector lost 35,000 positions due to a low barrel price - from US$100 last year to US$44 currently. Besides cutting jobs, oil companies are also suspending dividends and cutting board compensation. Those measures contribute to lower expenditure and reduced capital budgets for the coming years.

During the oil boom, many companies invested in the oil sector, benefiting from the price increase. As Canada does not have control of global oil prices, and as interest in buying oil from Africa and the Middle East (where oil rich countries sell at a low price compared to global market price) are growing, Canada’s oil industry is no longer an el dorado even if the oil price crisis ends. Before the oil price drop, oil companies in Canada aimed at developing technologies to exploit the oil sands in the Alberta region and to expand their activities to oil refinery. But achieving such technological advances requires a lot of investment, and in the current crisis period is not a priority as the price of oil extracted from tar sands is not competitive. Its exploitation also already faces opposition because of environmental damage.

Canada exports other mineral products besides oil, particularly iron ore and nickel which are crucial for steel production. China is the world’s largest importer of iron ore and is an important export market for Canada’s mineral exports. In 2009, China imported 22.4% of pellets and 28.3% of concentrates from Canada. The Canadian iron ore sector offers competitive prices compared to the U.S. but at times, depending on the import country, the distance reduces the competitiveness of Canadian iron ore. China’s growing demand for resource imports benefited Canada’s mining and oil industries. Such huge demand for commodities from China contributed to shoring up other countries’ economies, including Canada’s, through the rise price of resources. But with China’s declining resource imports, Canada’s resource sector faces difficulties in selling to markets other than the U.S. Such difficulties are also complicated by the current crisis in the global resource market, with lower prices somewhat determined by emerging producers in Africa, Latin America, Asia and the Middle-East.

In the current resources crisis, Canada needs to rethink its resource policies in order to resurge as a stable economy. But it is likely that Canada cannot do much, as the boom or decline of the country’s resource sector is linked to its export markets like the U.S. and China, alongside the production capacity and competitive prices of emerging resource-rich countries in Africa, Latin America, Asia and the Middle-East, which contribute to shifting fundamentals in global resource markets.

CONCLUSION

China’s hunger for resources contributed to the economic growth of the world’s resource-rich countries. The current downturn of China’s economy impacts the global commodity price and the future of resource-rich economies. China’s urbanisation and modernisation during the last three decades helped resource-rich countries export coal, copper, steel and other mineral products (including rare-earths which are crucial for future green economies) necessary to the country’s economic transformation and industrialisation. Between 2004 and 2011, China’s dire needs for resources tripled the price of mineral products in the global market. While for a decade or so, the production capacity of countries rich in steel, copper, coal and oil increased, the current decline in demand and production excess have been the main reasons for the current situation in the resource sector, leading to the economic slowdown of many economies, unemployment, the depreciation of currency, and many other aspects.

* Daouda Cissé is Research Fellow at the China Institute, University of Alberta, Edmonton.

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