Why is China's growth being reduced

The 27 year span is roughly what is traditionally referred to as a generation. If you follow that, China's economy grew more weakly in the second quarter than it has been in a generation. "The Chinese boom is slowly but surely coming to an end," says Gabriel Felbermayr, President of the Kiel Institute for the World Economy (IfW). This will have an impact on the German economy, which is now heavily dependent on the Asian country.

While China's economy grew by 6.4 percent in the first quarter, it was only 6.2 percent from April to June. Numerous observers blame the conflict with US President Donald Trump, who is attacking the Asian economic power with punitive tariffs at historically unprecedented levels. "The trade war with the United States was the main brake factor," says the economist Edoardo Campanella of the major bank Unicredit. IfW President Felbermayr calculates that Trump's punitive tariffs cost the Asian economy around 30 billion euros in gross domestic product in the short term. That would be 0.3 percentage points less growth every year.

The new data did not cause any negative reactions on the financial markets. Hope for improvement dominates here. Both retail and industrial production rose surprisingly strongly in June. Analysts also attribute this to economic policy measures, such as lower interest rates and looser credit. The fact that these measures are effective feeds hope that the government in Beijing will stimulate the economy even more. Most recently, plans were presented to make it easier for companies to do business and invest. Such measures could also help in the trade conflict with the USA. After conciliatory signals between Washington and Beijing at the latest G20 summit, a US delegation is due to travel to China shortly to negotiate.

"The trade war means that growth in China will decline faster than without it," says trade expert Felbermayr. "What is clear, however, is that the dynamism is tending to decline even without the US tariffs." On the one hand, this is due to demographics - the 1.4 billion population is aging and, according to some studies, shrank for the first time in 70 years last year. "The momentum is also declining because of the slow end of a growth policy, which was mainly driven by technological imitation and huge investments. The high debts weigh on the economy and reduce the government's scope to boost the economy with new debts."

Between 2008 and 2011, the economy grew by almost ten percent every year, sometimes more. In 2019 as a whole, Felbermayr's institute expects only 6.2 percent, in 2020 5.8 percent. And some economists consider the official figures to be up to two percentage points exaggerated.

The effects of the Chinese slowdown are huge. Almost a fifth of world demand is currently generated in China. Every percent less growth depresses the global economy.

The Federal Republic is particularly affected. While half of Europe slipped into a severe depression after the financial crisis in 2008, the German economy soon boomed thanks to exports. Many deliveries of goods went to the Middle Kingdom. Now it doesn't run so smoothly anymore. "China is becoming increasingly difficult, especially for German mechanical engineering," observes Felbermayr.

If you look at the exports and imports of goods, China is now Germany's most important trading partner, ahead of the USA. "German exports react much more strongly, so that the dynamics of exports to China are around 0.5 percentage points weaker than if China were to grow by 6.5 percent per year."