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Battening Down the Hatches
Is the Chinese Economic Juggernaut Slowing?

The prediction that China’s economy will not continue to grow at its current blistering pace is looking wiser. The most recently released data on the health of the country’s manufacturing sector are especially disappointing, the Wall Street Journal reports:

The latest sign of sluggishness came Thursday, when preliminary August manufacturing data showed an unexpectedly sharp drop in growth. It follows other signs of a slowdown in July, including weak domestic investment demand, a sharp drop in credit and a third consecutive monthly decline in housing sales.

The data have blunted hope among economists that the world’s No. 2 economy would finish more strongly this year after a slow start. That could have implications for the still-slow global recovery, as China has long been a major world growth engine.

“In the bigger economic picture, June’s probably as good as it gets,” said Julian Evans-Pritchard, an economist with Capital Economics.

President Xi Jinping has been conducting a party purge in the name of anti-corruption, eliminating powerful rivals while cowing those who remain into silence and submission. For the public’s benefit, he has been playing the humble, dutiful Communist who takes action against the extravagance of China’s elite, while punishing foreign firms in an attempt to bolster homegrown companies.

As we’ve argued, Xi aims to make China’s power structure leaner, meaner, and more dependent on one man than it has been since Mao died—all in the expectation that both geopolitical and the global economic trends will not be going China’s way. It’s too early to know how the country’s economy will finish out the year, but this looks like a sign that rougher seas may be ahead.

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  • Jacksonian_Libertarian

    I’ve been saying all along that China’s economy is headed for the wall. It’s easy to grow fast when your economy is one of the most backward in the world and your farmers are still using water buffalo to cultivate their fields. The US’s strategy of using free market capitalism to uplift mankind, saw China as the lowest hanging fruit. So the US encouraged businesses to build technologically modern and efficient factories there to bootstrap 20% of mankind up out of abject poverty. Now that China has been dragged forward it no longer looks like a good place to invest. The cheap labor is no longer cheap, and the lack of the “Rule of Law” makes the risk no longer worth it without the cheap labor. Now it becomes obvious that the “Feedback of Competition” that forces continuous improvements in Quality, Service, and Price in free markets is mostly suppressed in China, where the state owns much of the economy and where political power trumps the “Rule of Law”. A survey of Chinese businesses finds no world class brand names, revealing a huge gap in creativity and innovation between Western businesses and Chinese businesses (Chinese factories built with western know how, are becoming dated, and will continue to decay). This proves the fact that “it is easy to catch up to someone that is breaking trail for you, but much more difficult to be the one breaking the trail”. China has mostly caught up with the west, now any growth will become much harder, and China lacks the institutions (Democracy, Free Markets, Rule of Law) to advance past the west.

    • dan

      Excellent. I’m sure Tom Friedman will soon be sending you an email congratulating your perspicacity and apologizing for his many articles praising the Chinese economy and wishing the United States could be more like China.

  • Curious Mayhem

    This is old news if you listen to Bloomberg. China’s “honest” economic boom ended more than a decade ago. It entered a bubble phase in the 2000s with an artificially low currency (much like Japan in the 1980s), then got a powerful monetary stimulus in 2009 from its large foreign currency reserves.

    But, alas, like all forms of central planning, such policies mobilize resources, then wantonly waste them through lack of proper market prices (including interest rates and wages). Since late 2011, we’ve been on the downward slope of this artificial secondary bubble. The next financial crisis will probably start there.

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