China is facing its most difficult economic environment in years. The world’s second-biggest economy is in a trade standoff with the biggest -- the U.S. -- and under pressure from President Xi Jinping’s “critical battles” to reduce China’s massive debt pile and clean up toxic air pollution. Economists forecast 6.2 percent growth this year, more than twice the global rate. But that’s down from about 6.6 percent in 2018, already the slowest in almost three decades. When China sneezes these days, many companies far from its shores risk catching a cold, including makers of airliners and handbags, growers of soybeans and operators of tourist attractions.

1. What explains all the worry?

Size, mainly. China’s $12 trillion economy accounts for almost a third of global growth each year. Economic expansion contributes to job creation and improved living standards. Investors fear that China’s currently gradual deceleration might suddenly become a plunge. Given the advanced age of the U.S. expansion -- more than nine years -- and worries about growth in Europe, the ripple effects would probably be more than the global recovery could take. The Chinese government’s drip-feed approach to supporting output has so far failed to shore up confidence.

2. Why is 6 percent slow?

Because China’s economy is loaded up on debt. Its ability to service repayments depends on rapid nominal growth, which generates higher tax revenues and reduces the need for more government borrowing. Slower growth therefore challenges China’s ability to control the pace of its buildup of government, corporate and household debt -- which according to Bloomberg Economics calculations are on track to together add up to more than 300 percent of GDP by 2022. At that level, China would be the second-most indebted nation in the world, behind only Japan.

3. How’s the slowdown being felt in China?


In myriad ways. The auto industry in 2018 posted its first drop in annual sales in nearly three decades, hitting not just Chinese manufacturers such as BYD Co. Ltd. and Geely Automobile Holdings Ltd. but global giants like Volkswagen AG. Retail sales, long a pillar of the economy, grew at the slowest rate in a decade, suggesting the slowdown may be broadening. The official manufacturing index slid into contraction territory in December for the first time since 2016. Measures of new orders and new export orders slipped despite some manufacturers front-loading shipments to avoid potentially higher U.S. tariffs. Industrial production was the weakest in a decade in November and industrial profits fell for the first time in almost three years.

4. What about the rest of the world?

When Apple Inc. cut its revenue outlook for the first time in almost two decades, citing weaker demand in China, global equity markets swooned. Starbucks Corp., which has been opening a new store in China every few hours, saw its same-store sales growth begin to slow in 2018. Jaguar Land Rover shut a U.K. plant for two weeks in October, blaming sinking demand in China. And the list goes on. Chinese consumers accounted for roughly a third of the $121 billion spent on luxury goods worldwide in 2017. Many of those purchases are made outside China, making companies like Louis Vuitton, Gucci and Hermès heavily dependent on globe-trotting mainlanders. Indeed, the whole travel and tourism sector is nervous. About one of every four jets that Boeing Co. builds is bound for China. The country also accounts for more than a fifth of the money spent annually by outbound tourists, almost twice as much as the next-biggest spender, the U.S.

5. How bad could it get?

A severe slowdown in China could shave 1.5 percentage points off U.S. GDP growth over two years, according to a report by Bloomberg Economics. Among commodity exporters, Russia would be hurt the most. Trade-dependent Singapore and Hong Kong would also suffer badly. Taiwan, Thailand and other countries that feed components to China’s massive manufacturing machine are also threatened. An analysis by Deutsche Bank AG estimates that while China notionally exports about $45 billion worth of mobile phones to the U.S., for example, more than 80 percent of the value comes from parts imported from other Asian countries as well as American-owned intellectual property.


6. Why is China slowing?

Simply put, because such a breakneck pace of growth can’t continue forever. As the country ages, there are fewer working age adults to drive output. There are fewer easy investment opportunities, like making up for missing infrastructure. And the debt overhang means more activity has to go to paying back for the spending of the past. All of this means that China’s growth rates are on a gradual glide path downward, and managing the current slowdown is more about ensuring the pace isn’t too abrupt, rather than engineering a vigorous rebound.

7. What’s China doing?

Trying to walk a fine line. The fire-hose stimulus that followed the global financial crisis kept China from a Great Recession like the U.S. suffered but swelled the debt mountain. Now it’s trying to do just enough to prevent a hard landing -- where the economy flat-lines or flirts with recession -- while avoiding another debt buildup. It’s rolling out measures to stimulate sales of cars and household appliances and is looking at widening this year’s fiscal deficit. It softened its long deleveraging campaign, cut taxes, added infrastructure projects, eased monetary policy a tad and increased bond financing. After cutting the reserve requirement ratio for some banks four times in 2018, in January it announced the first all-inclusive cut since March 2016, a move to encourage banks to lend. There’s also been an unprecedented push by senior officials to cajole lenders into making more loans to private companies, which make up the majority of employment.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Paul Geitner, Grant Clark

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