No fear of a hard landing
Updated: 2012-07-28 10:29
By He Weiwen (China Daily)
Panic responses to fall in China's growth rate are unwarranted because economy is on right track to meet this year's target
China's GDP grew by 7.8 percent in the first half of 2012, falling below the 8 percent psychological barrier, with the second quarter rate being as low as 7.6 percent, the sixth consecutive quarterly slowdown. This has created panic in some European and American media, and caused plenty of worry in China.
On July 16, The Wall Street Journal said China would drag the world economy into "another recession". On the same day, a commentary in Germany's Die Frankfurter Zeitung titled "The fear of China crash" even warned that China is facing a catastrophic economic crash.
Some people in China, too, are worried about the continuous slowdown and a possible hard landing, and have appealed to the government to take necessary actions to sustain the 8-percent growth rate for the whole of 2012. However, these reports do not reflect the current state of the Chinese economy.
China has set this year's growth target at 7.5 percent. So, even if the economy continues to grow at 7.6 percent in the second half, the entire year's average will be 7.7 percent. China's 12th Five-Year Plan (2011-15) envisages an annual growth rate of 7 percent. Hence, if 2012 has a growth rate of 7.7 percent, the economy needs to grow only by 6.4 percent a year from 2013 to 2015.
An 8-percent growth rate was the "red line" for China during the 1997-99 Asian financial crisis and the 2009 global financial crisis. But that's no longer the case because China is shifting its focus from rapid economic growth to a more sustainable development model.
By examining the three driving forces of the Chinese economy for the second half of this year, one can better understand the economic slowdown.
First is the decline in fixed investment, which grew only by 20.4 percent year-on-year, that is, 5.2 percentage points lower than in the first half of 2011. The main contributing factors to this slower growth were declining real estate investment and decreased railroad construction. The former is the result of strict controls aimed at deflating bubbles and the latter a necessary adjustment after exceptionally high growth in previous years.
However, fixed investment in other industrial sectors grew by 23.8 percent. Total fixed investment was 15.07 trillion yuan ($2.36 trillion), or two thirds of the GDP, still the world's highest. These two changes, combined with impressive industrial fixed investment, are actually healthy signs for the Chinese economy.
The second economic driver is domestic consumption. Recent figures show the total retail volume was up 14.4 percent year-on-year. With a much lower consumer price index, the real growth rate hit 11.2 percent, 3.4 percentage points higher than the GDP growth. Another indicator of domestic consumption, auto sales, was up 9.1 percent, too. This means consumption is growing fast, a good sign as Beijing tries to rebalance the economy away from export-driven growth toward higher domestic consumption.
The third is foreign trade, which fell sharply in the first half because of the European Union debt crisis and vulnerable world economic recovery. As a whole, imports and exports grew just 8 percent year-on-year compared to 25.8 percent in the first half of 2011. The net export downturn was a major factor dragging down the Chinese economy.
But a modest rebound is expected once the central government's recent policy actions are gradually implemented in the second half of the year. The GDP slowdown is likely to bottom out during the third quarter, returning to 8 percent and slightly higher than 8 percent during the fourth quarter, thus taking the entire year's growth to about 8 percent. Needless to say, no recession is on the horizon, let alone a potential "crash".
China's imports grew by only 6.7 percent, slower than the 9.2 percent increase of exports in the first half. But imports from the United States grew by 7.9 percent. An empirical study of previous Chinese economic downturns and US exports to China shows American exports to China did not necessarily slow down even in "poor" years. During the global financial crisis, US exports to the world fell by 18 percent, while its exports to China fell by 0.3 percent only.
It would be wise to be cautiously optimistic about US exports to China in the second half, because data indicate they were already picking up in the second quarter.
The above statistics and the US economy's makeup belie another of the US' criticisms against China. There has been a continuous, raucous bashing of China in the US this election year amid the high jobless rate and weak economic recovery. China's trade policy has been blamed for "taking away American jobs" and thus being the main cause of US economic malaise.
But US labor data show how unfounded that accusation is. The US non-farm sector added a total of 1.78 million jobs from June 2011 to June 2012, a 1.35-percent increase. There was an increase of 1.64 percent in its goods producing sector and 1.91 percent in manufacturing. This shows the sectors producing internationally tradable products have an above average job growth rate. Jobs in the auto and spare parts sector shot up by 8.8 percent, although many have complained against fast imports of auto parts from China.
Job losses, on the other hand, occurred in information services (down 1.54 percent), and government (down 0.76 percent). At 0.35 percent, finance and insurance barely had any growth. It is worth mentioning that information service, government, finance and insurance sectors are not internationally tradable.
So the Chinese economy should be viewed as being on the cusp of a much-needed transition, not an impending crash. China's current GDP growth rate is on track to meet the target set for this year. Fixed investment in certain sectors has slowed to cool inflated sectors of the economy while still improving in others. Foreign trade will rebound once the global economy picks up and hopefully expand, given China's increased emphasis on greater domestic consumption.
The author is co-director of the China-US/EU Study Center at the China Association of International Trade.