October 19, 2011

China GDP Growth Slows, Professional Bears Cheer (Guest Post)

By Stan Abrams

From NYT:
"China’s economy pulled back a bit from its pell-mell pace in the third quarter, the government said Tuesday, as measures to rein in inflation and head off speculation put a brake on growth.
The measured slowdown raised hopes among economists that the steps taken so far would bring the economy to a so-called soft landing, with moderate growth and lowered inflation, instead of a steep decline."

If you haven’t been following economic trends in China recently, the big items include inflation, particularly food prices, problems with the real estate market (the big debate has been whether a bubble exists), and whether growth will ease off gradually (aka a “soft landing”) or suddenly (aka a “hard landing”).

Everyone agrees that these GDP numbers reflect a slowdown. However, there is some disagreement on what that means in the grand scheme of things. Certainly Beijing has been working very hard to bring inflation under control, and slower growth sounds like good news to me. Assuming these trends are real, this all sounds positive:
"Consumer inflation in China has been running at three-year highs in recent months and Beijing has been steadily tightening monetary policy over the last year in an attempt to rein in overheated growth and slow rapid price increases.
Inflation is showing signs of having peaked, with the consumer price index rising 6.1 per cent from a year earlier in September, down from a three-year high of 6.5 per cent in July."
Given the scary things that can happen when inflation gets out of control, you’d think that everyone would be happy. Unfortunately, the story is a bit more complicated than that:
"China’s economy grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, driving stocks lower on concern that Europe’s debt crisis is dragging on the global recovery.
The gain was less than the median estimate of 9.3 percent in a Bloomberg News survey of 22 economists and followed a 9.5 percent increase in the previous three months. The statistics bureau released the data in Beijing today."
Right. Even though a slowdown is good for China’s economy with respect to inflation, the markets had a slightly higher growth target. So we saw a market dip in China and Hong Kong, among other places, because of the slow growth here. Keep in mind that the markets in a particular country do not always reflect the general health of an economy; sometimes growth, good for certain companies/industries in the short term, isn’t good for the country in the medium/long term.

Other things to worry about include a real estate market, which may finally be tanking, and a faltering export market, upon which China still relies heavily. The latter brings in concerns about the rest of the world, complicating the story even further.

Let’s face it, things are not so great in Europe and the U.S. at the moment, and these numbers from China suggest that the days of the PRC as the big engine of global growth may be ending. At the same time, to the extent that China’s economy still relies upon exports, a contraction in those overseas markets will be a downward pressure on growth here in the future.

So there’s a lot to be worried about (and I’ve left out a lot of other scary issues), even if China seems to be experiencing the moderate slowdown that policy makers wanted. That takes care of the optimists and the realists. What about the pessimists?

Yes, our old friends Roubini and Chanos (and their bearish ilk) have jumped in as well. One suspects that regardless of the growth statistics, they would have added their gloomy interpretation to the debate. These guys have put their professional reputations on the line predicting some sort of China crash in the near future, so they’re riding this out to the bitter end:
"China’s efforts to prop up economic growth won’t help it escape the hard landing that will probably arrive in 2013 or 2014, said Nouriel Roubini, chairman and co- founder of Roubini Global Economics LLC."
"The prospect of a soft landing in China is a “mission impossible,” Roubini said[.] (Bloomberg)
China is heading into an economic storm, and the much-feared hard-landing of the world’s second-largest economy has already started, warned celebrated hedge-fund manager and China-bear Jim Chanos of Kynikos Associates on Monday."
“The numbers are falling faster than we thought,” said Chanos[.] (MarketWatch)
So this is quite a mixed bag, isn’t it? The economy has slowed moderately, and everyone seems able to cherry pick something to prove his own particular case. The stock market goes down, and yet the government says things are under control. The real estate market contracts, yet folks like Chanos say that the pace is too fast.

For what it’s worth, I don’t listen to the professional bears, nor do I pay attention to the market. Folks who are betting on a particular outcome are biased, and their advice is suspect.

I’m more interested in overall stability, and I’ve been more worried about inflation and real estate than anything else recently. To the extent that a moderate slowdown will help to alleviate the problems, the latest numbers look pretty good. That being said, there are certainly big questions remaining out there on the export front, with the banking sector, and the scary situation with local government debt.

Call me an optimistic neutral.

Further Reading - The Pitfall of Rock Star Economists

About The Author - Stan Abrams is a Beijing-based IP/IT lawyer and law professor. Stan has an M.A. from Johns Hopkins in International Relations, a J.D. from Boston College Law School, and a B.A. from Pomona College.  Stan maintains a blog at China Hearsay.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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