The Impact of China on the European Economy

The Impact of China on the UK and European Economies

Since opening up to the world following a series of economic reforms instigated under the stewardship of Deng Xiaoping in the 1970s and 80s, China has pursued a textbook policy of export led growth which has seen its economy rise from just 2.8% of global GDP in 1980 to stand at 12.2% in 2013. And while the Chinese economy has already begun to ease back from the double-digit growth it has realised over much of this period, even a slowing China stands to far outpace advanced economies over the coming decade.

Such a dramatic transformation in the global landscape, on a scale which eclipses even that of the industrialisation of Western nations in the 18th and 19th centuries, has inevitably had a marked impact upon both the UK and the rest of Europe. Initially this could be seen in the influx of low-cost textile and manufactured goods, made possible by the relative cheapness of Chinese labour. The continued industrialisation of the Chinese economy has seen China's appetite for commodities accelerate rapidly, pushing up global demand and ultimately raising the prices of many raw materials.

Throughout the course of China's development saving has remained elevated as the economy has yet to adjust to Western style patterns of consumption. The sheer scale of China's transformation means this has noticeably altered the quantity of investable funds in the global financial system. The increase in Chinese savings on the world stage has been instrumental in bringing down the costs of borrowing in Western economies, which in turn played a role in fuelling incentives to pursue the risky investments which preceded the financial crisis in 2007.

More recently, a slowing of growth in China, and indeed in many emerging markets, has started to relieve upward pressure on commodity prices, resulting in a more benign outlook for inflation across the globe. Meanwhile, the expanding middle class in China has stoked increased demand for more luxury items, providing greater opportunities for the UK and Europe to expand exports into the Chinese market. From luxury cars to financial services, the potential to capitalise on China’s rising wealth is one which Western economies are acutely aware.

Alongside rising wealth and economic development, China's international focus is beginning to change. After years of concentrating investment on sourcing energy and raw materials to feed its industrialisation, China is beginning to look at higher value added investments, with the acquisition of intellectual property becoming more evident in recent activity. In the short term, this provides the UK and Europe with the potential to access greater levels of capital to boost their growth prospects. In the longer term, however, it will become increasingly important to remain competitive as China looks to move higher up the value chain and into areas where more advanced economies currently hold their competitive advantage.

The Chinese economy has begun to ease off the accelerator as it begins the process of rebalancing. Meanwhile the outlook for the UK and, to a lesser extent, the Eurozone, is strengthening. After slower growth through the first half of 2013, China witnessed an increase in the pace of economic expansion in Q3, and is now expected to hit its growth target of 7.5% for 2013. After three decades of break-neck paced growth, China appears to be experiencing a cyclical slowdown, exaggerating the deceleration in growth driven by the changing nature of its economy and demographics. The returns on investment have fallen, and the country is beginning to lose its competitive advantage in manufacturing as wages rise. China needs to find a new growth trajectory, based around domestic consumption rather than investment. While its population of 1.3bn people should provide plenty of scope for this, it will also be important to ensure that the policy environment is conducive to rebalancing the country's growth path.

In the UK, recovery has taken hold and growth in the short term shows little sign of slowing. The unemployment rate has fallen back to 7.4% - its lowest level for over four years - and inflation continues to ease and now stands at 2.1% on the consumer price index. Both business and consumer confidence rose sharply through 2013. While growth was achieved across all broad sectors of the economy, alongside tentative signs business investment is starting to pick up, a lack of export growth remains a key missing link in the UK's recovery.

In the Eurozone, there has been less to cheer about. Despite technically exiting recession in the second quarter of 2013, a 0.4% contraction is expected for 2013 as a whole. A deficiency of demand is undermining growth prospects, reflected in the fall of annual consumer price inflation to just 0.9% in November 2013's data. In response to such news, the European Central Bank moved to cut interest rates further, to just 0.25% in the same month. Economic growth of 0.7% is expected in 2014.

Cork Gully is part of Jolliffe International with offices in Beijing and Shanghai. Jolliffe International is currently special advisor to the Governors of Yunnan Province and Shandong Province, China.