Politeía Digest

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The Economist Corner – essential readings XIV

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China’s economy

Defanging China’s growth

China is slowing. That’s good news

DON’T paint a snake with legs, the Chinese will say, when someone is in danger of spoiling something by overdoing it. For months China’s policymakers have been trying to slow the country’s economy, which grew venomously in the year to the first quarter. The fear is that policymakers will overdo it, spoiling one of the rare sources of dynamism in a moribund world economy.

There were few signs of that in the economic picture provided by the National Bureau of Statistics this week. China’s output grew by 10.3% in the year to the second quarter, the bureau said, slower than its growth in the previous quarter (11.9%), but not too much slower (see chart). Inflation also eased, falling back below the central bank’s official target of 3%, thanks partly to cheaper fruit and vegetables.

In recent months, the price of fruit and veg has troubled policymakers less than the price of bricks and mortar. They worried that a property bubble and a mortgage boom, if left unchecked, might threaten the balance-sheets of households, banks and local governments alike. But the average house price in 70 of China’s cities fell by 0.1% in June from a month earlier, the first decline for well over a year. The drop follows the government’s efforts in April to curb speculation in the property market by stiffening mortgage rates and raising down-payment requirements.

As prices fall, homebuilding will follow. The government hopes to offset this decline with a rapid expansion of affordable housing. It has set provincial governments a target of 5.8m new homes this year. But Stephen Green of Standard Chartered doubts that local officials will take this quota too seriously. They may buy unwanted housing off developers, which would placate their overseers in Beijing but add nothing to China’s GDP. Or they may rush to start projects this year, but take their time in finishing them.

China’s slowdown is not necessarily bad news—by most measures, China’s economy is now operating at full capacity. Nor is it really news. Other indicators of activity suggest the economy has been slowing for some months. Although the country’s first-quarter GDP figure was eye-popping, this was only in comparison with the miserable first quarter of 2009. Several economists reckon the quarterly growth rate peaked last year.

Indeed, Mr Green thinks China’s policymakers have already finished the job of slowing the economy. Unlike some of their neighbours, they have not raised interest rates. Nor did they allow the yuan to strengthen against the dollar until last month. But in China, Mr Green says, what counts is the “fine print” of policy. The government looks serious about curbing credit, having told banks not to add more than 7.5 trillion yuan ($1.1 trillion) to their loan books this year, a huge amount but still 22% less than last year. Regulators have also stopped banks from co-operating with trust companies, which got around credit quotas by raising money from banks’ retail customers and lending it to property companies, among others. The central government has begun to rein in local-government borrowing and it is approving fewer infrastructure projects. But if policymakers fear they have added legs to the snake, they will lift these measures as quickly as they imposed them.

China’s economy

Hello America

China’s economy overtakes Japan’s in real terms

CHINA has become the world’s second biggest economy according to data released on Monday August 16th. Japan’s economy fell behind China’s at market exchange rates in the second quarter (it has been number three in PPP terms for some time). These numbers are not strictly comparable: Japan’s data have been seasonally adjusted while those for China have not. Quibbles aside, Japan will surely be eclipsed soon, if it has not been already. Data compiled by Angus Maddison, an economist who died earlier this year, suggest that China and India were the biggest economies in the world for almost all of the past 2000 years. Why they fell so far behind may be more of a mystery than why they are currently flourishing.

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Written by Theophyle

August 19, 2010 at 1:10 pm

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