China Decelerating

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China’s GDP growth rate slowed to “only” 9.1 percent in the third quarter after news last week that the inflation rate is also slowing to “only” 6.1 percent. Chinese macroeconomic numbers should probably be taken with several grains of salt, but I think the trends are considered reliable and we can see a few different things here.

One is that macroeconomic stabilization policy works. The Chinese government has really strongly wanted to not have a recession. They were and are determined to not have mass unemployment. And they did it. It’s true that there have been costs to this. Some of the projects China has undertaken over the past three years are wasteful. For years to come we can expect to hear tales of various white elephants. And the inflation rate is high. It’s not cataclysmic hyperinflation, but a 6.1 percent inflation rate is annoying and inflation’s gone higher than that. But all that said, I think most people in both China and the United States have spent the past two years thinking China is in a better situation than the United States. Its economy has grown. Our has stumbled. Chinese people are working. American people are not working. Overbuilding infrastructure can be wasteful, but having people sit on the couch scanning help wanted ads and feeling depressed about their unlucky fate is much more wasteful. What’s more, it’s perfectly possible to turn things around and return to tightening when the time is right. It’s not the case that “once you pop, you can’t stop.” They did stimulus and it worked, now they’re doing disinflation and it’s also working.

The other thing you see here are that the limits to the Chinese growth model are now very visible on the horizon. They’re going to want to push the inflation rate down lower than this, which is going to mean saying goodbye to the days of 9 percent growth. That in turn means that for Chinese families to keep seeing rising living standards, they’re going to need to start getting a larger share of national income. Right now, the Chinese growth model is built around an absurdly low level of household consumption and an absurdly high level of investment. The way to slow down while also improving human welfare is to save/invest less and consume more. This is the “rebalancing” the United States desperately wants China to undertake, and it’s really the only way forward for China.