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China’s Economy Slows, Hits Worst Level Since Crash

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.

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  • Anthony

    I read an interesting and contextually related point: “the U.S. economy has created 2.6 million jobs since June 2009. In the same period, 3.1 million workers have signed up for disability benefits. Back in 1992 there was one person on disability benefits for every 36 people in employment. Now the ratio is 1 to 16. Unemployment is being concealed….” Can a similar economic policy shift (by whatever name) be utilized as safety valve by China?

  • Jacksonian Libertarian

    The economy expands at 7.6% but electricity usage stays flat, that’s impossible. Modern civilization has replaced muscle power with energy, this means their is an energy cost to everything we do. For the Chinese economy to have grown 7.6% without a similar increase in electricity means they would have to improved their energy efficiency by 7.6%. Is that even possible?

  • Luke Lea

    “can maintain the rapid increases in living standards that have acted as a safety valve in relieving social and political pressures.”

    Like you said, Chinese statistics have to be taken with a grain of salt. We don’t know whether Chinese living standards are rising, let alone rapidly. There are an estimated 100,000 riots annually in rural townships. Really, we know little about the true situation in China. The Party wants to keep it that way.

  • Dean Jackson

    @Jacksonian Libertarian

    Two things. In theory it is possible to get the increased measured output without the concomitant increase in electricity usage although in the time frame you are discussing it seems unlikely. For example, it could arise from shifts in what is being produced which either require a different form of energy, say oil, or which possess a different elasticity w.r.t. energy inputs.

    Second point, an economics shop out of London, Lombard Street Research, estimates that the true 2Q increase in GDP in China was approximately 4%.

  • Kris

    Anthony@1 reminds me of a related point. We all know of the electoral models that formalize the inverse relationship between the unemployment rate and the odds of an incumbent being re-elected. How much of this is due to actual unemployment as experienced by the public, and how much of it is due to the perception of unemployment?

    Luke@3: “we know little about the true situation in China. The Party wants to keep it that way.”

    Well, Hayek among others elaborated on the drawbacks of central planning. Simply, the planners cannot have sufficient information to function optimally. So we have here the planners’ “solution”: ensure that nobody else does.

    I’m not sure just how tongue-in-cheek that was.

  • Robert

    And let’s crash it even more! Boycott China!

  • Mark

    On the electricity usage question, Dean has a good point: one reason why electricity usage has lagged is that a lot of Chinese aluminum production has been taken off-line due both to overcapacity and market pricing lower than production pricing. Aluminum production is very electricity-intensive, so that inefficient growth was (we assume) replaced with other, less energy-intensive growth.
    As Dean mentioned, it is not likely that shifts in China’s inflexible economy could take place so quickly, so there is likely a large fudge-factor at work.
    On the remarks on consumption that appeared late in the piece, take those statistics with a large grain of salt. The Chinese government is well aware of international criticism of their over-reliance on investment and exports as sources of growth. Given what we do know of China’s recent growth, and what we can reasonably guess, it is likely that investment grew even more as a share of GDP at the expense of consumption. Even the Chinese bureaucrats I have met with recently now admit that consumption is a function of exports (yes, they still matter, contrary to what had been asserted over the last few years) and investment (housing and infrastructure).

  • Rich K

    I spent the weekend reading all the noise at ‘real clear markets’ and its pretty obvious that those who are vested in china doing well are going to see the shiny side no matter the opinion of the opinion writers in finanace.Those who are willing to look behind the curtain(see what I did there)will surely see that things are not quite what the politburo wants the rest of us to see.Only time will tell though,right Walter!

  • Foobarista

    @JL, you can grow the economy with flat energy consumption with improved production methods; the “energy intensity” of modern economies improves over time as processes are improved throughout the economy. China can certainly improve its energy efficiency by closing down 50 year old Mao-era plants and replacing them with cheaper-to-run new facilities, and often does so.

    But this sort of thing can’t happen all that quickly, so there’s definitely fudging going on.

  • Mark

    one other interesting note on inflation: inflation that is too low (and 2% likely is) is also not good for China, or at least not the large, state-owned enterprises that dominate stock market capitalization and many strategic industries. Interest rates (those charged by banks, not in the informal lending market) used to be negative, lending an extra source of profit to those who could borrow from banks at official rates -largely the state-owned enterprises. Now, interest rates are positive, so they are an expense.
    Also important to note that the more that China cuts interest rates, the more they move from their stated (and stated for a long time, but never realized) goal of moving to promote consumption as an economic driver, as repressed interest rates are a tax on savers and a subsidy to borrowers, the SOE’s.
    Lastly, it’s not at all clear how much lower rates will spur borrowing. My guess is lower rates will not increase loan growth much, certainly not as much as hoped for. This is because constraints to credit growth are more about the structure of the rationing rather than the cost.
    I don’t want to sound like a China uber-bear, I’m not. I do believe that the engines which powered China over the last 20 years (when they first devalued their currency, by around 30%) have reached the point where they are no longer practicable. They must move to a new model or suffer a tremendous bust. Even moving to a new model ensures that growth will fall dramatically, trend growth should be closer to 3-4%, and the transition will prove difficult economically and politically. I personally think the transition will prove too difficult to completely, or even mostly, implement because it really means a complete overhaul of the Party’s control over the economy (and thus the country), which I don’t think they will ultimately be able to do. So for the foreseeable decade or so, we will have a command economy with a forced consumption element (by fiat of government subsidy) and more volatility than we have seen over the last decade. Not that we will know much of what’s actually going on, because the Party will see fit to release data that they think makes them look good in the world’s eyes rather than accurate data, similar to the way it has been.

  • teapartydoc

    The Blue Model isn’t working out very well in China, either. Thomas Friedman, call your office.

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