(Version in 中文)
“Economic Shifts in U.S. and China Batter Markets” continuing “Stocks Slide Globally…Investors Head for Exits” read the front page headline in last week's New York Times. Not sure about the U.S. part, I’ll leave that to others. But, as for China, this seems quite a stretch. Could be the pundits are erring in blaming the market slide on China, or perhaps the markets are misreading news coming out of China.
The purported China trigger was a survey of manufacturers. The Purchasing Managers’ Index (PMI) fell somewhat, crossing the magic threshold from expansion to contraction. PMIs are useful, but let’s not get carried away. China’s PMI is not the best indicator for growth, the decline was rather small, and January and February data (because of the Lunar “Chinese” New Year) are hard to interpret.
In early January, we actually raised our forecast for China’s growth in 2014. Specifically, from 7¼ percent projection made in October to 7½ percent. The subsequently published 2013 data—7.7 percent annual growth—matched our expectation and we reaffirm our forecast for 7½ percent growth in 2014.
So, yes, we see a moderate slowing in China’s economy. This is expected, indeed welcome, as China moves to a more inclusive, green, and sustainable growth path (see “China: Why Less is More”). Our projection is for growth to slow 0.2 percentage points. This is peanuts for an economy growing at 7½ percent. And, given the momentum in domestic demand and improved outlook in advanced economies, growth this year could very well be higher.
Specifically, we expect domestic demand to moderate as the government implements its recently announced economic blueprint. While containing the risks from rapidly expanding credit and rising local government debt will put the economy on sounder footing, it will also be a modest drag on domestic activity. This is a good tradeoff for securing long-term growth. Thus, buried in our forecasts is a slowing of domestic demand—over ½ percentage point—partly offset by rising net exports fueled by the global recovery.
Global markets are understandably interested in developments in China. It is the world’s second largest economy and a critical source of global demand, especially for commodity producers. Continued healthy growth is thus important for both China and the world. Healthy growth, moreover, likely means a gradually slowing economy. Slowing to the fastest sustainable growth rate possible, which we estimate would be around 6 percent on average between now and 2030. In this case, China would continue to boost living standards at home while providing welcome support to the world economy for many years to come.