There are many news reports indicating that the Chinese economy is faltering. China has maintained a strong overall growth rate thanks to strong exports, but that growth engine may not be sustainable given the possibility of growing protectionist headwinds. Domestic sectors such as housing and retail sales are quite weak. Financial Times:
China’s economy grew 4.7 percent in the second quarter from a year earlier, official data showed Monday, below expectations and a slower growth rate compared with the previous three months. The data came as the Communist Party of China’s Central Committee began its third plenary session on Monday, a four-day meeting where the country’s leadership is expected to set the direction for economic policy. The last time such a meeting was held was in 2018.
Eswar Prasad, an economics professor at Cornell University, said the latest data release “will add fuel to growing calls for more stimulus measures, including financial support for households and broader reforms to foster a more favorable business environment for private companies.”
“Relying on exports for growth will inevitably lead to increased trade tensions with China’s major trading partners,” he said.
While Western economists continue to recommend further fiscal stimulus, it is becoming increasingly clear that China’s real problem is an overly restrictive fiscal policy. Financial policy:
In nominal terms, GDP grew 3.97 percent in the first quarter and 4.01 percent in the first half of the year, according to data accessed via Wind Information.
Before we consider what this data means, let’s clear up a few misconceptions.
1. The fact that China’s nominal growth rate is lower than its real growth rate is not in itself a problem. If it is driven by productivity growth, this may be considered “good deflation.”
2. I recommend 4% NGDP growth for the US and do not believe this number will be a major problem.
So what exactly is China’s problem? In my view, the biggest problem in China today is not the fact that NGDP is growing at 4%, but rather that Chinese monetary policy is slowing the NGDP growth rate too quickly. For over 40 years, China has experienced much higher NGDP growth rates. The sharp slowdown to around 4% caused the economy to stagnate. If 4% NGDP growth is the ultimate goal, a more gradual slowdown in nominal growth would have been better.
If the Chinese government decides that it wants to maintain a somewhat faster NGDP growth rate closer to 5% for a few more years, it should ignore Western calls for fiscal stimulus and focus on using monetary policy to boost NGDP growth. China already has a large debt problem, and the last thing China needs is to emulate the mistakes of Western countries whose public debt is now on an unsustainable trajectory.
I worry that China is making the same mistake that Japan did in the 1990s and 2000s. The Japanese government was reluctant to provide sufficient monetary stimulus, perhaps out of concern that it would lead to excessive currency depreciation. Instead, it relied on a massive fiscal stimulus, which was completely ineffective. Japan got no NGDP growth, but instead accumulated huge public debt. Ironically, there are now signs that Japan is finally emerging from its long period of zero NGDP growth, perhaps because the government is finally willing to tolerate the necessary currency depreciation.
Abenomics was announced in late 2012.
