There have been many news reports suggesting that China’s economy is slowing down. Strong exports have allowed China to maintain a strong overall growth rate, but that growth engine may not be sustainable, especially given the potential for rising protectionist headwinds. Domestic sectors such as real estate and retail were particularly weak. here is the Financial Times:
China’s economy grew 4.7 percent year-on-year in the second quarter, official data showed Monday, missing forecasts and marking the slowest growth rate compared to three months ago. . . . The release of the data comes as the Central Committee of China’s Communist Party on Monday held its third plenum, a four-day meeting where the country’s leadership is expected to set the direction for economic policy. The last such event was held in 2018.
Eswar Prasad, a professor of economics at Cornell University, said that the latest data release “will add strength to the growing discussion of stimulus measures, such as family financing, and broader reforms to promote a favorable business environment for private enterprises” .
“Relying on exports for energy growth will lead to increased trade disputes with China’s major partners,” he said.
While Western economists continue to recommend more fiscal stimulus, it is becoming increasingly clear that China’s real problem is over-restriction. monetary policy:
Statistically, GDP grew by 3.97% in the first quarter, and 4.01% in the first half of the year, according to data accessed by Wind Information.
Before considering the results of this data, I would like to clarify a few misconceptions:
1. The fact that China’s marginal growth is slower than its real growth is not a problem in and of itself. This may be considered a “good reduction”, if driven by productivity growth.
2. I have recommended 4% NGDP growth in the US, so I don’t see that number as a big problem.
So what exactly is the problem in China? In my opinion, the biggest problem in China today is not the fact that NGDP is growing at 4%; rather that China’s monetary policy has slowed down the rate of NGDP growth too quickly. For more than four decades, China experienced the highest rates of NGDP growth. A sudden drop in speed to around 4% caused the economy to stagnate. If 4% NGDP growth is the ultimate goal, it would be better to reduce the growth rate gradually.
If the Chinese government decides that they wish to maintain somewhat faster NGDP growth for a few more years—say closer to 5%—then they should ignore Western calls for fiscal stimulus and focus on using monetary policy to increase NGDP growth. China already has huge debt problems, the last thing they need to do is copy the mistakes made in the West, where public debt is now in the wrong direction.
I worry that China may be making the same mistakes that Japan made in the 1990s and 2000s. The Japanese government was unwilling to create enough currency, perhaps out of concern that it would lead to excessive devaluation. Instead, they relied on massive financial incentives, which proved to be completely ineffective. Japan did not grow NGDP and instead had a huge public debt. Ironically, there are now signs that Japan is finally escaping that long period of NGDP growth, perhaps because the government is finally willing to allow the necessary devaluation.
Abenomics was announced in late 2012:
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