China: GDP Keeps Slowing but Very Gradually

Econintersect:  China had the slowest GDP growth since the Great Repression (Q1 2009) in the third quarter according to the official data released by the National Bureau of Statistics of China today (21 October 2014).  The year-over-year growth for Q3 was 7.3%, lower than the 7.5% of the second quarter and 7.4% in the first quarter, but higher than a consensus estimate of 7.2% reported by Reuters.  When it comes to the accuracy of single quarter GDP measurements for any economy (and especially a large economy like China) Econintersect would suggest that all three readings reported so far in 2014 are essentially equivalent, and a reasonably accurate interpretation would be that GDP is probably growing between 7.2% and 7.6% for the latest three quarters, with an addition measurement uncertainty of a couple of tenths of a percent possible.

The summary headlines from the official press release announcing the results:

• Agricultural Production Showed Good Momentum.
• The Growth of Industrial Production Remained Stable.
• Investment in Fixed Assets Slowed Down.
• Sales on Domestic Markets Enjoyed a Steady Growth.
• The Growth Rates of Imports and Exports Picked up.
• The Growth of Consumer Price was Generally Stable.
• Residents’ Income Kept Steady Growth.
• Money Supply Maintained a Steady Growth.

Sheng Laiyun, spokesman of the National Bureau of Statistics, offered the following comment to CNBC:

The economic slowdown was due to structural reforms in the nation, a sagging housing market and higher comparison figures from a year ago, but it should be noted that growth stayed in a “reasonable range.”

There is some debate about what the latest data means for China.  Reuters has a discussion that focuses on the expectation that China will try to keep its GDP growth above the  7% annual rate and that stimulus effrts are to be expected. Bloomberg took the view that the economic performance “bolsters the case for stimulus restraint“.

Some feel that high a growth rate of 6% or 7% is unsustainable and must come down by at least half from current levels.  If this is not managed in an orderly fashion these sources say that the decline could become disorderly, as in a crash.  GEI contributor Michael Pettis has produced analysis indicating that China must reduce its GDP growth to about 3% by 2020 to maintain an orderly evolution of the economy.

An NBER paper this month by Lant Pritchett and lawrence Summers suggests that reversion to the global mean growth rate is the usual maturing process of high growth economies.  They find that the Chinese economy would average less than 4% GDP growth rates averaged over the boom and slow years.  This is consistent with reaching 3% or lower GDP growth in the coming years.

China’s challenge is to get growth down to an average rate in the 3% range without going much lower and needing a recovery before settling into the sustainable mean.

John Lounsbury

Sources:

• Overall Economic Development Kept Performing in a Proper Range in the First Three Quarters of 2014 (Press release, National Bureau of Statistics of China, 21 October 2014)

• China’s third-quarter GDP data beat forecasts (Li Anne Wong, CNBC)

• China posts slowest growth since global crisis, more stimulus expected (Jake Spring and Xiaoyi Shao, Reuters, 21 October 2014)

• China’s GDP Growth Bolsters Case for Stimulus Restraint (Xiaoqing Pi, Bloomberg, 21 October 2014)

• Incomplete Rebalancing Will Eventually Be Completed (Michael Pettis, GEI Analysis, 21 October 2014)

• Asiaphoria Meets Regression to the Mean (Lant Pritchett and Lawrence Summers, Working Paper 20573, NBER, October 2014) Restricted access.