China economy: The Chinese economy looks healthier when it slows. The rate of GDP growth is slipping, from the heady 12 percent during the first quarter to 9.5 percent for the whole year, according to the State Council Development Research Centre. And it is likely to fall to a new normal rate of eight-nine per cent. But in China’s case, less is actually likely to be more.
The new growth rate may look low by recent Chinese standards — 10.7 per cent average of the last five years — but is still comfortably above the eight per cent needed to absorb displaced farm workers, the key to social stability. It is also still almost fantastically high in the global context.
Some of the growth slowdown will come almost naturally, as higher domestic wages and a pricier yuan make investments in labour-intensive export-oriented factories less attractive. But the government is helping, by trying to slow down the frenetic 30 per cent growth rate in bank lending. The rest of the world should be grateful. A rebalancing of China’s trade accounts will help support growth elsewhere. A greater reliance on consumption is likely to reduce the volatility of exports. And slower lending growth ultimately reduces the chances of a financial catastrophe in China, which would ripple through an already fragile global system.
While the real Chinese economy can probably adjust to a slower growth rate without trouble, there is more risk in cooling down the overheated financial system. Loan growth could slow in a disastrous way: bringing a collapse in asset prices, a sharp fall in the growth rate and a rise in inflation.
But that scenario looks unlikely. If growth seems to be falling too far, the government should be able to stimulate, just as it did after the 2008 global trade collapse. After all, China is still poor enough to respond quickly to pro-growth policies. And the state, which controls three quarters of China's wealth, has levers to pull.
China greatest growth sprint is probably over. But the marathon runner seems to be in pretty good shape.
