The Chinese Growth Story

This came in overnight via the FT.

China’s economy expanded 8.9 per cent in the fourth quarter of last year, extending a slowdown that began at the start of 2011 and is expected to continue into 2012.

That’s a full percentage lower than Q1 2011. So clearly the Chinese economy has slowed in reaction to both global slowing and the Chinese authorities’ attempts to cool asset and price inflation. Here’s the thing though:

The gradual slowdown led most analysts to conclude that Beijing has managed to engineer a “soft landing”, as price increases have fallen back from a peak of 6.5 per cent in July to 4.1 per cent in December.

Is that the right analysis? And why?

Many other analysts are also predicting a sharper slowdown in the coming months.

“We expect GDP growth to slow more markedly in the first quarter due to the sharp investment slowdown under way,” economists at Citi said in a note.

JPMorgan expects economic growth to slow to 7.6 per cent from a year earlier in the first quarter of 2012, driven down in part by declining exports to the EU and Japan.

But a deceleration has long been expected – the question has been whether it will be gradual or a hard landing.

Jim O’Neill is saying Chinese GDP numbers are “a blow for the hard landing guys” whereas analysts like Patrick Chovanec are taking the other side.

Poll below


Based on the voting on this poll so far, I see this as a major economic issue where there is no consensus. I think the outcome will be a driving force of stock and bond market valuations globally by the second half of the year.

Source: Financial Times

P.S. – To give you a sense of how China bulls see this, the World bank says China can grow 8pc annually for two decades. Update: Also see my post from last which asks: Has Anyone Noticed The Mammoth Shifts in Chinese Economic Policy? We are now on the backside of the initial burst of Chinese economic policy changes. Now it has to be about domestic consumption.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com

21 comments

  1. YankeeFrank

    who the hell is still buying all the crap they produce to allow them to grow at even 5% per year going forward? I mean, I know we in the US cannot avoid buying their products because that’s all that’s for sale in most places, but can we really be expanding our purchases that much each year?

  2. tyaresun

    On the one hand people say that China contributes a very small (2.7%?) of PCE in the USA and on the other hand they keep on hyperventialting about a hard landing in China.

    I believe in the fist part. The only thing the hard landing in China, if one occurs, will be to bring down commodity prices. The net effect on the global economy is likely to be minimal.

    The only big thing is Europe.

    1. Fifi

      No hyperventilation, at least in my own quarter. It’s going to hurt commodities and

      But the China story is particularly interesting because of the notion that an authoritarian regime like China’s is better at managing the economy then a more “messy” democratic one. So, what we have is a real-life, real-time experiment of that notion.

      1. YankeeFrank

        I see, so the definition of managing an economy is to be solely determined by GDP growth, not worker living standards, rights, privacy and health. Of course, its silly of me, we should change our government to a command-style capitalist system, clearly EVERYONE is much better off that way. Let’s be clear: GDP, as Robert Kennedy made clear over 40 years ago, measures everything except what is important to a happy life. It doesn’t suggest anything about how well the masses of the people live; if they live in peace and prosperity with civil and human rights, or if they are miserable drones who don’t dare step “out of line” for fear of imprisonment or death. Do they have decent education, food and healthcare, or are they poisoned and ignorant? Ideas like deciding how to organize a society based on measures like GDP betrays a complete ignorance of the history of humanity and the justification for our (admittedly weakening) constitutional rights and freedoms. Societies are not businesses, and the current trend in our society to judge everything using money as the measure is as unwise as it is purely and unequivocally evil.

  3. jsn

    At the Minsky conference last April I sat next to Andrew Sheng (http://ineteconomics.org/people/bretton-woods/andrew-sheng) at lunch. He said to me “China is run by engineers, not lawyers. We get our systems to work and when they don’t we re-design them.” or something like that, it’s been almost a year. But in our conversation his point was that China will not let its REAL economy stall and it understands the tools it has at its disposal.

    As the Minsky conference is a Levy institute affair and had a bunch of neo-chartilists on panels and in attendance and China has probably the longest history with fiat money in the world, I expect he meant they are re-plumbing to become a consumer society of some sort, their own new kind, and that they more or less know what they’re doing.

    While they’re not open to our political ideologies, they certainly know how to use money to make employment to keep thoughts off politics. That is how to deploy it in the real economy for political effect. If they give people enough work with enough income to raise living standards, they just may end up giving most people most of the freedoms they want without having to yield it up politically.

    Labor is no doubt highly abused in many cases at present, but don’t be surprised if that starts to change. I think they’ve realized that mercantilism with fiat money leaves you with a bunch of highly contingent IOUs. If so their response will be to sell to themselves and to do that they need to push incomes out to the broadest possible base, which they seem to be starting to do.

    1. Yves Smith

      To play devil’s advocate:

      1. No economy has ever had a smooth transition from being an investment/export driven economy to a consumer economy.

      2. Having a consumer economy requires infrastructure, namely retail stores and storekeepers. But if you have storekeepers in advance of consumerism, they just go broke. This is not easy to solve, although it clearly does happen over time. But the idea that you can make it happen quickly in a dirigiste manner does not seem likely.

      3. The data is the reverse of your thesis. China has had consumption fall as a percent of GDP. Michael Pettis has written long form that the stealth bailout of the Chinese banks in 2003 had the effect of suppressing consumption. The banks are in trouble again, yet another reason to think consumption share is not gonna rise.

      4. US economists in the 1960s were convinced they had everything figured out, engineering-like (Walter Heller’s “fine tuning”) and virtually the entire economics profession was again in triumphalist mode in early 2007. They saw the Great Moderation as proof of their success in managing economies.

      Hubris among economists generally precedes a fall.

      1. jsn

        I would agree with all those doubts to, in fact I have over the last twenty years as I’ve watched China consistently raise its standards of living while reading economists predictions that it’ll all end in tears any minute, a lot like the “bond vigilante” myth they propagate here. The story of inevitable failure is always easier to argue, but it just hasn’t happened yet. Yes it will be hard and yes there will be lots of disasters and collateral damage and yes there will be tons and tons of wasted money. However the macro trends on Chinese growth make a pretty convincing counter argument.

        I follow Pettis and although I’m sure he’s a lot smarter than I, I suspect he has the western bias of thinking more about the capital flows and the value of capital than about effects in the real economy. Consumption has dropped, a real economy problem, and smog is increasingly unbearable, another real economy problem, but as the problems define themselves we’ve seen pretty pragmatic responses from the mandarins and we’ve seen them try pretty radical stomps at the accelerator and brakes until they get the growth they want.

        I don’t think Sheng was claiming any one had anything all worked out, but I do think he was claiming that there was a recognition that what had to be done to deliver on growth expectations had to be done and that there was no particular ideological conviction behind how the levers of power were being pulled. It was more healthy fear of consequences than hubris. But of course this is all pure anecdote. I quipped it off in response to the “who the hell is still buying all the crap” ahead of me!

      2. Peter Pan

        My recollection from watching a video interview of Steve Keen is that he believes that China can avoid a hard landing. But then Michael Pettis seems to think not since its economy is moving toward more exports and less consumption, ultimately leading to a Japan style bust scenario.

        I’d like to see these two credible economists debate this issue face-to-face.

        1. jsn

          This link Yves posted today suggests that China’s problems are more political than economic. As economic power is allowed to concentrate and consolidate it locks in an untenable status quo. It is amazing to me how similar the concentration of economic power through political corruption looks in this article to the problems we face here in the US: http://english.caixin.com/2012-01-17/100349432_all.html

    2. Lune

      I second Yves’ doubts.

      Every country’s elites assume that they are doing a great job running the country. As long as things really are going well, many non-elites tend to agree with them. But it doesn’t make it true.

      To the American examples that Yves mentions, I’d add Japan’s vaunted bureaucracy in the 80s, Europe’s pan-European “technocratic” institutions, etc. etc.

      To answer Prof. Sheng’s assertion, China isn’t run by engineers. It’s run (like every other country) by politicians. The original profession in which they trained doesn’t really matter once they enter the halls of power.

      And as for getting their systems to work, or re-designing them if they don’t, even an undergraduate engineering student will tell you that such decisions are complex decisions involving trade-offs.

      For politicians, their first goal is remaining in power. All other considerations are secondary. While I don’t doubt that the best and brightest of China’s establishment have the tools to understand and reform their system, that doesn’t necessarily mean they’ll do the right thing for the country. After all, Ford had legions of excellent engineers, but that didn’t make them redesign the Pinto even after it blew up…

    3. Dennis

      I am sorry but that was hilarious. Our country is run by engineers so it wont fail? The Japanese used to say that their capitalism was superior/West is decadent and weak too.

      1. jsn

        The comment about engineers was delivered more in the mode of “I’m really more interested in what works in reality than theory”, in the spirit of trial and error around which all engineering standards are built: an engineer never trusts life safety to “theory”, practice always hangs on systems tested to failure. There was no claim that things would not fail. For all I know Sheng is a psycho, but he was a charming table mate!

  4. joecostello

    I have a question, what are the historical examples of what economists consider a “soft landing?” It is my experience, that basically the propagandists at the ministry of economics inc./ltd, always predict growth, and that when they start talking about “soft landings”–rare–its pretty much time to cover your head.

    Although, if not mistaken the panic of 2008 caught them all off gaurd, and when big parts of global economy started, I think it was the third and fourth quarters, contracting at 8-9% if i remember correctly, well, the idea of a soft-landing was right out the window, even for the best in breed.

    Good thing we fixed the financial system, now we can talk about soft-landings again.

  5. Paul Tioxon

    It may pay to accept the change in policy to domestic consumption including social spending on a national safety net infrastructure, commensurate with a modern industrial manufacturing country. The surplus capital can not build more steel, more ships and more chemicals if there is no market. Hence, the rational policy shift to unload cash on social spending, including uenemployment, health care and retirement pension funding. Simply pushing up commodities or creating asset bubbles such as real estate leaves the CCP open to political upheaval. The safety valve theory of social spending will reduce financialization of the ecnomoy while stablizing society and strengthening the political hold of the CCP as builders of wealthe but also rewarding those who have labor long and hard and have not become fantasistically wealthy. There does not need to be more and more capital investment in factories when the world is flooded with the goods from existing plant and equipment. The money is now shifted by the state and in the service of the state, to secure social peace and quell mounting political unrest.

  6. vlade

    WB: “China can grow at 8% for the next 20 years”
    I wonder where they put they fingers to get numbers like these.
    8% growth for 20 years compounded means ~4.6 absolute growth. Let’s assume that China will use energy twice as efficiently as it does now (which is simple extrapolation that they can continue to do 20% improvement every 5 years – and of course can be miles wrong), so it will have to use 2.3 times as much energy as it does now.
    Let’s look at oil, as it’s the easy one. It’s now using about 10m bpd, so it’s going to be extra ~13m bpd (assuming proportional increase in oil use, which again can be wrong).
    That means it would be about 25% of the (current) world oil use – fair enough, with its population and like. Except that current spare capacity is about 4.4m bpd. So we would have to increase the output of oil by about 8m bpd by the next 20 years.

    Possible?
    Maybe, I don’t know. (you can argue about shale and the like).

    But it sure sounds like one of possible preconditions for China growing at 8% for the next 20 years. China neither lives in vacuum, nor can it operate as an autarky, so any claims on what’s going to happen for the next x years are just puff of hot air.

  7. Hugh

    I suppose the first question is does anyone believe the Chinese figures. Banks in the US and Europe have been insolvent for several years now. In the US, the government has allowed them to cook their books and run joke stress tests to show that they are basically sound. Europe ran its own fake stress tests for much the same purpose. My point here is that we have had reason to question Chinese economic data for a long time. Now the talk is of a soft landing and lo and behold the data show a soft landing. Is this real or merely convenient?

  8. Fiver

    Whatever else, the idea that China can grow at 8% for another 20 years is sheer lunacy.

    Nobody seems to have noticed that globalization has hit a fundamental snag – it turns out there’s not only no such thing as everyone’s a winner, but that if we’re not very, very careful, we will all be massive losers. And “careful” has no place for a China with a footprint that size without creating a major whack of very unhappy losers.

    China is insane if it does not:

    1) Slow down.

    2) Orient its economy towards what can actually be sustained, not this Instant Mega Everything Replica of the FAILED 20th-century US/global oil-based economy.

  9. Philip Pilkington

    It all depends on how fearful the Chinese are of inflation. If I were advising them I’d tell them to run up double digits. In my view this is a necessary prerequisite to raise living standards and wean the Chinese off exports. The CCCP currently seem to be suffering from inflation denial and genuinely believe — contrary to most historical evidence — that living standards can be raised significantly without a period of moderate inflation. Look to LatAm, I would say, they’ve got it right.

    Of course, the CCCP leaders don’t read my comments at NC. So, it all depends on how much they’ve internalised the inflation fears. Which in turn depends on how much the wealthy in China have gained control over politics.

    Like most, I am thoroughly ignorant of the Chinese political system. But my impression is that they see the dangers of debt deflations clearly and have not been brainwashed in the Western fear of inflation. They must look at what is going on in the West and compare it with what is going on in LatAm, and in this they must realise which is a safer path to take.

    It all rests on this though. My bets are on the Chinese.

  10. Chris Rogers

    Most economists I deal with here in North East Asia, and I’m not talking Rogers-based in Singapore now, have always been sceptical about Chinese growth figures, particularly when weighted against actual electricity consumption, water consumption and the like.

    Indeed, in any given annual reporting season in China from all its Provences, one was always struck by the conformity in growth figures, this despite the obvious geographical differences, population divergence’s etc. etc.

    Whilst there can be no doubt that China has made huge economic strides, and yes, a large swathe of its population shifted out of absolute poverty, to keep banging on about a ‘Chinese Economic Miracle’ seems way off course.

    Obviously, a country with well over a billion population and a government committed to being at a minimum a large regional economic and military power is going to see growth, the question is, if this growth will mirror that of the USA, Post War Europe or Japan.

    For me, my money is always on the South Koreans, followed by Japan and Taiwan. China may be a mighty tiger, unfortunately, our world does not have infinite resources to feed its ambitions – hence, the US military desire to encircle China with as many compliant partners as possible.

Comments are closed.