China's economic woes foreshadow global slowdown

August 23, 2015

Factory making high-speed trains, a symbol of China's rapid growth.

The dramatic slowing of China’s economy has significant consequences for world growth. Official statistics likely overstate China’s official growth rate of 7%.

Several key indicators of economic health have fallen sharply compared to their four-year average. For example, electricity output has basically stopped growing compared to its four-year average growth rate of 5%. Car sales are in negative territory as are imports, including of key industrial commodities.

The trend in official Chinese government growth statistics leaves no doubt that the country’s rate of growth is slowing: 10.6% in 2010, 9.5% in 2011, 7.8% in 2012, 7.7% in 2013, 7.4% in 2014 and 7% for the first half of 2015.

But, as Deutsche Welle reported on August 12: “Weaker growth, a volatile stock market and faltering exports have highlighted the weakness afflicting the Chinese economy. Experts, however, fear China’s woes are much more serious than what the official data suggest ...

“Furthermore, concerns abound about bubbles building up in the economy. For instance, analysts at global bank Credit Suisse believe that China is undergoing a 'triple bubble' — a combination of the third-largest credit bubble, the biggest investment bubble and the second-biggest real estate bubble of all time.”

Many analysts believe that Chinese growth figures are heavily adjusted to ensure the country hits announced government targets. They therefore study the performance of more easily measured indicators of economic activity, like electricity output, car sales and imports of key industrial commodities.

These indicators are in sharp decline. The Wall Street Journal reported in April: “When China released its tabulation of first-quarter growth earlier this month, the 7% figure — the worst in six years — stirred fears of a deepening slowdown.

“It also raised fresh doubt about the trustworthiness of China’s own statistics.

“'Growth Likely Overstated,' said a Citibank report, concluding that actual quarterly growth could be below 6% year to year, depending on the factors weighed. Other research firms put their numbers far lower …”

China’s recent decision to allow its currency to devalue is one measure of government concern. The government no doubt hopes that the devaluation will jump-start exports and growth but this is unlikely given the general weakness in demand in most markets.
In fact, China’s economic slowdown will itself translate into a deepening global slowdown.

As the country’s growth slows so does its demand for parts and components produced in other Asian countries and primary commodities purchased from Latin American and sub-Saharan countries.

And as growth in all three regions declines this can be expected to put downward pressure on growth in core countries, especially Japan and Germany, both of whom also rely on an export-led growth strategy.

[Martin Hart-Landsberg is professor of economics at Lewis and Clark College, Portland. Abridged from the author's blog.]

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