China's Economy Steadies

After more than a year of major turbulence, China’s economy appears to have steadied in recent months, raising hopes that the worst is over for the world’s second-largest economy.  In fact, not only did China’s GDP data suggest that the country’s economy was steadying, but so too did much of the other economic data that has been released in China in recent months.  Nevertheless, while China’s economy appears to be avoiding the much sharper downturn that many economists had predicted, it is likely that economic growth rates in China will continue to slowly trend downwards in the years ahead, a normal development for a country that has reached middle-income status.  Moreover, it is important to remember that even 6% GDP growth in China today contributes more growth to the global economy than China’s 14.2% growth did back in 2007 as the country’s economic output has risen dramatically since then.

In the second quarter of this year, the Chinese economy expanded by an official rate of 6.7% on a year-on-year basis, matching the growth rate recorded in the previous quarter.  This figure was slightly above expectations and remained well within the Chinese government’s target range of 6.5% to 7.0% GDP growth.  Moreover, even though China’s actual growth rate was likely somewhere between 4% and 5%, this too represents a stabilization of the Chinese economy after a very turbulent period.  In the second quarter, both retail sales and industrial production beat expectations, with consumer spending continuing to play a larger role in driving growth in China.  On the other hand, growth in fixed asset investment was lower than expected, although this can be seen as a positive sign as China’s economy needs lower levels of such investment in order to proceed with its rebalancing towards a consumer-driven economy.  Altogether, the second quarter proved to be somewhat reassuring for businesses and investors in China, although many risks remain in place.

Looking ahead, there are a number of reasons for optimism regarding the Chinese economy.  For example, retail sales growth rates remain above 10% as consumer spending in China continues to grow at a strong pace.  This is a key to China’s longer-term growth, for as China moves up the wealth tables, consumer spending will have to become the leading driver of growth in that country.  Nevertheless, the Chinese economy faces a number of serious threats that cannot be ignored.  For example, as wages rise and the yuan remains strong, China’s export competitiveness is faltering, a dangerous development at a time when many of the country’s leading export markets remain weak.  Moreover, China continues to face serious threats from overcapacity in many manufacturing sectors and dangerous market bubbles in many areas, both of which threaten China’s long-term economic health.  As a result, China’s economy appears set to resume its slowdown in the years ahead, although a hard landing remains unlikely over the near-term.  As long as China can manage its slowdown and its rebalancing, the global economy will avoid a serious shock.  However, as China is now the leading contributor to global economic growth, a serious slowdown would have devastating repercussions for the global economy.