China’s Slowing Economy

China’s Slowing Economy

Jamie Metzl

Please have a look at my CNN interview on China’s slowing economy, linked here.
 
Just released GDP, import, and export numbers all indicate a further slowing of the Chinese economy. The 7% quarterly GDP number is probably overstated, and the 13% drop in imports can be explained mostly in terms of lower prices for importing oil and iron ore, but the big surprise was the unexpected 15% drop in exports. Part of this export drop probably stems from the decrease in commerce during Chinese New Year, but a bigger part results from the RMB strengthening relative to major currencies other than the dollar. As the dollar has strengthened and the managed value of the Chinese currency has remained relatively fixed to the dollar, the value of the RMB compared to the Yen and the Euro has increased. This would help explain why China’s exports to Japan and Europe fell 25% and 19% respectively this past quarter, while exports to the US only fell by 8%. Clearly, China’s age of double digit growth is over and it will need to get used to a new era of lower GDP growth, probably between 4% and 7%.
 
The big question for China is whether this necessary slowing can be a controlled glide towards a more sustainable economy or if it represents the beginning of what might become a financial crisis. Although the growth of China’s debt, its continued misallocation of resources,  and its long-standing property bubble are all causes for concern, I so far give China’s leaders the benefit of the doubt as they work to lay the foundation for a future economy that needs to be less driven by investment and production and more driven by services and consumption. The core problem China faces, however, is that its misallocation of resources and rampant corruption are ultimately political rather than economic problems. Although deft economic decision-making can help ease China’s transition, rebalancing the economy will, at the end of the day, require rebalancing society to reduce the power of the state and SOEs and enhance the power of the people and small businesses. If China can achieve that political goal, it will unleash the tremendous potential of its remarkable population. If it can’t, all the economic management in the world will not make enough of a difference.