China’s second quarter GDP numbers are in, and the news isn’t very promising. Growth dipped to 7.6 percent—the lowest level since the country emerged from the depths of the financial crisis at the start of 2009, and down from 8.1 percent in the first quarter. Part of the slowdown has been attributed to weak demand for Chinese exports in Europe and the U.S.Despite this poor result, some Chinese-based economists believe the true growth rate is at least half a percentage point lower than what the official statistics say. Chinese economic data is notoriously unreliable and other proxy measures, such as electricity output, are essentially flat. Meanwhile, foreign investors are looking elsewhere in Asia for stability. China is increasingly viewed as a place for investors who want some risk in their portfolio.There was a hint of good news for Chinese officials in the latest figures: inflation, which has been a major concern in the past two years, is under control, allowing China’s reserve bank to cut interest rates for the second time in two months. And consumption as a share of GDP is up significantly in the past 12 months, allaying fears that China’s economy is precariously tilted towards investment at the expense of domestic consumption.Still, as the Wall Street Journal‘s China blog points out, the headline growth rate is the big news:
Anyone hoping for a return to the glory days of double-digit growth is likely to be disappointed, though. Chen Dongqi, Vice President of the National Development and Reform Commission’s Academy of Macroeconomic research, said he expects GDP growth to come in below 8% year-over-year in the third and fourth quarters, with growth for the year as a whole between 7.5% and 8%.“China’s potential growth rate has fallen,” said Mr. Chen, “7%-8% is the new normal.”
In one sense, a “new normal” growth rate in the 7-8 percent range is certainly nothing to sneeze at, and any European (or North American) economy would be thrilled beyond words to see that kind of growth. And this doesn’t have to be a disaster; China could simply be following the well-worn path of its east Asian neighbors, such as Japan and South Korea, who similarly enjoyed three decades of spectacular growth before their economies settled into a period of slower but still respectable growth. But the question Chinese officials have to ask themselves is whether, at growth rate of 7 percent instead of 10 percent, they can maintain the rapid increases in living standards that have acted as a safety valve in relieving social and political pressures.We’ll have an answer to that question soon enough.