China’s Dilemma In Responding To Slow Q2 GDP Growth

We were expecting a weak second quarter GDP figure, and China hasn’t disappointed. Its economy grew by 7.6% between April and June, down from the first quarter’s 8.1%. That was sixth consecutive quarter of slowing growth, and the slowest quarter since the immediate aftermath of the 2008 global financial crisis. Though the number was in line with analysts’ expectations–and the expectations the government is trying to set for its citizens long used to double-digit growth–the nagging question is whether there is a bottom in sight, and thus the extent of the further stimulus policymakers need to provide in response.

The conflux of cyclical and structural slowdown makes this more difficult to get right. The usual remedy of infrastructure spending via state-owned enterprises delays the necessary rebalancing of the economy that will provide the long-term growth of the future. Beijing won’t want to reverse its measured deflation of the property bubble or risk a sovereign debt crisis blowing up as it tries to defuse the local government debt bomb. A mess of either sort is not the economic legacy the outgoing leadership will want to hand on to its successor.

Like governments in developed countries, Beijing has to face the fact that it is neither the price nor volume of money available that is the problem now but the lack of demand. In China’s case changing that means structural reforms, both to put private capital to work and to free up consumer savings for both that and consumption. If there is a silver lining to the current dark economic clouds, it is that financial reform in China tends to be easier to push through when the economy is going through rough spots than it is when the economy is charging ahead gloriously.

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