Cautious Optimism About China’s Economy

Prime Minister Wen Jiabao weighed his words carefully earlier this week. While on an inspection tour of Zhejiang, he sought to strike a balance between being realistic about the current situation and optimistic ahead of the imminent leadership transition. China’s economy continues to be buffeted by the global economy, particularly the eurozone crisis, he said, but signs of an end to the slowdown in growth are there to be seen.

China's real GDP growth, % change, annual

China’s annual real GDP growth, % change. Source: World Bank

That slowdown has been more prolonged than China’s economic planners expected. As the chart to the left shows, the days of double-digit annual economic growth are receding into memory. They would have anyway, given the stage of the country’s economic development, but the global economy has provided extra drag.

The official target for real GDP growth this year is 7.5%. (We have made that the baseline on our chart.) Originally set as a low-ball target, as is the leadership’s custom on the principle of under-promise and over-deliver, the final outcome will be closer to it than at first intended. Making sure it is hit, and the feared “hard landing” avoided, has become the policy priority. Monetary policy has been eased. Tax breaks given. Interest rate cuts, two and modest, have been made. Infrastructure investment spending has been brought forward. Every effort is being made, though, not to re-inflate the property bubble which, with its attendant potential bad bank lending risks, Beijing has been letting down so carefully.

The success of another economic battle that lasted longer than expected, against inflation, gives policymakers scope to tweak domestic demand with further administrative easing. Further significant cuts in interest rates are unlikely, we believe. June and July’s rate cuts also experimented with rate liberalization. Officials will want to give themselves as much time as possible to assess the effects of that change, a change that the reformers among their ranks want to make on a grander scale. No crisis is too bad to be wasted.

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