China’s Growth: Still Envy of the World Despite Slowdown
The latest release of Chinese economic data has been portrayed as unprecedented: The Wall Street Journal, BBC, CNN, and NPR all ran headlines announcing the “slowest growth in 25 years.” Such framing lends itself to overreaction, as it fails to convey that China in fact reached its target of annual inflation-adjusted output growth of “around 7 percent.”
Many of the factors contributing to the gradual slowing of China’s growth rate—from rising labor costs to rebalancing towards the service sector—are both natural and desirable. If GDP readings are not surprising (the International Monetary Fund has kept its 2016 projections for China unchanged, despite lowering its earlier forecast for global growth), should we be worried about the tea leaves of the financial markets? Does the speedy decline of Chinese stocks in the past two weeks presage turmoil in the real economy?
Peterson Institute fellows tend to be skeptical that the stock market decline in China conveys any novel information about the Chinese economy in 2016. My colleague Nicholas Lardy points out that many market participants put excessive weight on the manufacturing sector indicators, and Olivier Blanchard sees no evidence of an imminent collapse of growth in China. Sean Miner and I have documented the weak association between stock prices and economic growth in China in the past. (This historical pattern is to be expected in a mixed economy like China's, where the firms that issue stocks are not representative.)
Volatility in equity markets can exacerbate legitimate fears about the challenges facing the Chinese economy, but it is hardly shocking that first-time retail investors would pursue momentum-chasing strategies. Financial sophistication accumulates only through experience. More frustrating than the stock swings are reports of fraudulent financial products: As many as 5 million people may have been cheated by a single peer-to-peer lending company that promised 14 percent returns to its clients. (The company’s 1.1 billion yuan in assets are reported to be frozen, and the ensuing panic escalated into protests.) Such stories are reminiscent of the Ponzi-like scandals that occurred in Eastern Europe during its economic transformation in the 1990s.
Ongoing domestic changes will have repercussions beyond China. While economic fundamentals do not suggest a sharp growth decline of the Chinese economy, many countries now count on China to buy their exports. This is not a problem for the United States. American firms have enjoyed access to Chinese markets (US exports of goods to China have more than doubled in the last ten years), but only 7 to 8 percent of all US exports are sold to China. Several major economies, however, (including Brazil, Australia, and South Korea) sell more than a quarter of their exports to China. If Chinese firms and consumers choose to buy fewer goods from abroad (or if import growth slows down), then economic growth in China’s major international trading partners will disappoint.