China, known for its high-value exports all across the globe, ranging from cell phones to knit or crochet clothing is now facing the dark side of the global economy. The East Asian country reported US $3.594 of shipping around the globe in 2022. Notably, China’s exports experienced a significant slump in the past 3 years. World’s biggest exporter is now facing a stability crisis.

China has been seeing a drop in Global demand which was a key driver of its growth. The recent decline in the export sector of China is a stark reminder to review its long-tested method to rely on exports to boost its growth. A major player in the export sector, China, has been a major exporter to a lot of countries like Germany.

The second biggest economy in the world plays an important role in the economy of the whole world. As a consequence, China’s recent export slump has to reconcile with various economies of the world. For instance, Germany has announced a change in its approach toward trade with China, reducing its dependency on China for sectors like pharmaceuticals, information technology, media technology, and others.

Structural Issues and Rising Costs in China

China is known to be one of those countries which is highly dependent on its export sector. This reliance has cost China a huge decline in its economic growth. This outdated approach set the Chinese economy to rely on global economic conditions for its growth. There have been attempts to shift its dependency from export lead to import lead lately but such a change means a change in the structure of the economy which is certainly a herculean task.

Another deep-rooted challenge lies in real estate. The real estate sector used to be a significant market in China. The country faced a sharp decline in this industry due to too many vacant and unfinished housing. Leading to a decline in shares of property companies which at one time used to be a principal asset for Chinese households.

Countries like the United States, which are expected to face a mid-inflation crisis, soon have reduced their dependence on imports from China. This, as a result, has impacted China’s GDP. With this realization where import-dependent countries are trying to shift their approach similarly the Chinese export-dependent economy has also tried to shift its approach to a more consumption-focused and balanced economy.

Fading of Cost Advantage against Global Competitors

The evolving global market requires a shift from traditional manufacturing to contemporary ones. China’s industrial structure is outdated and relies heavily on traditional sectors like textiles, low-value goods, and electronics. China’s potential is possibly getting compromised with its reliance on low-value goods contrary to the demand for high-value goods in the global market.

Another possible reason for China’s slump in exports is the rising costs of labor in the country. Along with the rising living standards of labor, the wages of the laborers have also risen significantly. This erodes the cost-benefit advantage of China in front of the countries with a lesser cost of labor.

It is also important to note that Yuan, the Chinese currency has appreciated. This again increases the price of Chinese goods in the foreign market. The strengthening of currency has reduced the cost advantage of buyers from other countries.

The Transition Challenge: Shift to a Consumption-based model

The recent export decline in China is an eye-opener for its approach toward its economic model. Though, a shift from its export-focused economy to a consumption-based economy is going to be a challenging task. This would transition the Chinese economy to a more balanced one. It would require a fundamental change in its investment strategies, consumption habits, and much-needed reforms in the state enterprises.

The consumption-driven approach is of supreme importance to China. It provides a sustainable alternative as the investment and manufacturing work in alignment with the demand, resulting in a balanced and steady economy.

The transition in approach brings along financial risk and debt strains. Reportedly, China has an overall debt of 282% of its annual economic output. Although China is one of the largest lenders to the developing Nations. While most of these developing nations are already facing a hard time with the heavy debt repayment to China. If this scenario continues the debt troubles for China would increase.

The local government of China has also reportedly been accumulating substantial debt on the back of infrastructure projects and growth in the region. Even though the Chinese market might balance out the crisis, risks of sharper troubles seem to linger. The sudden increase in debt would certainly have a lasting impact on its economy.

Implications for the Global Economy

An export slump in the world’s second-largest economy and the highest exporter has undoubtedly impacted the global economy. With its decrease in exports, it would contribute to the slowdown of trade across the globe. A chain of similar events is likely to follow leading to reduced economic activity.

The major impact would be faced by the semiconductor supply chain of the world. China is a major producer of gallium and germanium. Supposedly, China announced guidelines to put export controls on the export of gallium and germanium. Gallium is an important raw material for the production of LEDs, integrated circuits, and solar panels. Germanium is again an essential raw material for the production of optical fibers and infrared camera lenses.

China accounts for almost 80% of the global production of these two rare metals. Countries like Japan and Korea are expected to be hit with this export control as they are highly dependent on China for their semiconductor industries. This sudden announcement could be a retaliation to the previously announced US export control guidelines. But it is noteworthy that a country like China which is deeply dependent on its exports may end up hurting its own economy.

The ongoing fluctuations in the export market would seemingly lead to a shift in the dynamics of economic growth of other countries that aim to expand their export markets ahead of China’s export control.

As an integral player in the global economy, it is alarming to witness the inherent and outdated system of economic growth in China. Given that, China’s every step would largely impact the rest of the world. The failure of China’s trade and tested export-led growth model indicates the country’s inability to meet the shifting demands of the world.

Various economics strategists warn of China as sinking into a ‘balance sheet recession’. A huge amount is spent on paying down the debt rather than consuming or investing from their income. An economic apocalypse is seen to be nearing the lives of small businesses, migrant workers, and young graduates. It is very essential for China to strike a balance between transition and its financial vulnerabilities.

While China invests significantly in infrastructure-related projects and industries to grow economically, its strict policies have taken a toll on its citizens and businesses. China saw its weakest performance related to the economic growth of 3% in the previous year. Experts from the World Bank suggest China boosts its domestic activity in order to increase domestic consumption. Emphasizing various aspects that make a citizen feel confident in spending money like, enhancing aspects related to social welfare, health insurance, salaries, and pensions. 

It is for the countries to reassess their dependence on the outdated economic giant. The recent fall in exports is a testament to China’s failure in meeting Global demand with its old approaches. China must take bold reforms to walk along the ever-evolving world of economy.