China: As Growth Slows, the Need for Reform Grows

The world is closely monitoring the status of China’s economic growth rate. The country’s economy began to rapidly grow in the late 1970s, and it had been growing at about 9% or 10% per year, until the global downturn of 2008 and 2009. During the global financial crisis, the economy slowed abruptly. Since then, it has not been able to get back to that 10% growth rate.

In my view, China’s growth rate is taking a step down for two reasons. First of all, its export markets are not growing at anything like the rate they were growing previously, because of the global financial crisis. So with the US having subpar growth, the eurozone being in recession, India slowing down and Brazil growing very slowly — this all means that China’s exports are only growing at single-digit or low double-digit rates, not at the 20% to 30% rate of growth that we saw previously.

The second factor restraining China’s growth is that, although China instituted many reforms during the early stages of growth, the pace of reform has recently slowed. In particular, there has been very little reform in the financial sector, and there has been no substantive move to free up capital controls — only tweaking of existing controls. We have seen before with Asian economies like Singapore and Korea that if these countries did not continuously reform and liberalize, then they hit a ceiling in growth and slowed down.

China, to a degree, is hitting that kind of blockage, and they need to implement further reforms. However, the impetus to do that is lacking at the moment.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Invesco Distributors, Inc.

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