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China's Bubble
Good and Bad News in China’s Latest Figures

China’s latest GDP figures are out, and they aren’t great—but beneath the surface, there’s some good indications about China’s future. Bloomberg has the story:

China’s economy expanded quicker than economists forecast in the third quarter as the services sector offset weaker manufacturing, keeping Premier Li Keqiang’s 2015 growth target within reach.

Gross domestic product rose 6.9 percent in the three months through September from a year earlier, the National Bureau of Statistics said Monday, beating economists’ estimates for 6.8 percent. While that was the slowest quarterly expansion since 2009, based off previously announced data, stabilization will ease fears of a deeper downturn for investors and central bankers from Tokyo to Frankfurt to Washington.

Strength in services and consumption helped reduce the drag from weaker manufacturing and exports, showing the continuing transformation of the world’s second-largest economy. The pace of growth in the services sector quickened to 8.4 percent in the first nine months of the year, while so-called secondary industry — which includes manufacturing — weakened to a 6 percent expansion.

Like many of the reports coming out of China these days, this latest is a mix of good news and bad news.

In the first place, China’s growth continues to slow. There is some happy talk about how the GDP numbers aren’t as bad as feared. Yet, given the problems with Chinese statistics and the political sensitivity of the headline numbers, the figures to the right of the decimal point need to be treated with caution. We know growth has slowed substantially; we can’t be sure about the details.

This figures also suggest that China’s economy really does seem to be changing, with the move away from manufacturing and heavy industry and towards services looking real. It’s a sign that China is beginning to edge away from a growth model that is reaching its limits. A giant economy selling widgets can’t keep growing at ten percent forever in a world that is growing at three percent. This shift away from manufacturing is a good sign for China, but it will spell trouble for other countries. Combined with the overall slowdown in growth, that shift is very bad for producers of commodities and raw materials around the world. The countries and companies that prospered by shipping iron ore, oil, tin, manganese, and other raw materials into the maw of China’s industrial economy are going to suffer as if China was having a hard landing. Demand for their exports will slow dramatically even if China’s overall growth stabilizes at a lower level. These effects will ripple across Africa and Latin America, as well as countries in southeast Asia whose manufacturing economies are closely tied to China’s. Nations like Australia and Canada can also expect some problems—though their more diversified economies are better positioned to take a hit.

Finally, though greens will likely miss it, the shift from manufacturing to growth in services is an unalloyed good for the environment and it suggests that the gloom and doom predictions about humanity choking on growth are less likely to come true. Growth in the developing world is decoupling from energy usage, just as it did in advanced countries. Sophisticated economies move away from metal bashing toward much less environmentally-questionable activities like health care, oboe lessons, and software, and it is very good news that this is now happening in China. World economic growth and world environmental health aren’t on a collision course.

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  • Andrew Allison

    Chinese GDP outperformed the estimate by 0.1%? If you believe that, I’ve got a bridge I’d like to talk to you about.

    • Kevin

      Agreed. I’d like to see the breakdowns at the provincial level. If some were well above target and others well below it would be a bit more credible. If virtually every one reported growth at the target rate it will look Iike the whole thing was pencil whipped.

      • f1b0nacc1

        I remember my last trip to China which included a train ride from the coast about 500km inland. It was astonishing how taking that relatively short trip was like going backwards in time. China’s development and prosperity is a largely coastal phenomenon, and the further you go away from that region, the poorer and more backward you get….rather quickly….

  • Jacksonian_Libertarian

    The problem I see with the numbers is if China’s manufacturing sector is growing at 6%, that would mean a continued increase in the imports of raw materials needed to supply that still expanding manufacturing. So why are we seeing a double digit fall in Chinese imports? I think rather than accept the Government Numbers as something other than Politically Motivated. It would be wise to look at Electricity Use, or Fuel Consumption, to see if there really is expansion or if recession has already bitten China.

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