Many media reports suggest that the Chinese economy is in the doldrums. Strong exports have helped China maintain a solid overall growth rate, but this growth engine may not be sustainable, especially given the likelihood of increasingly protectionist headwinds. Domestic sectors such as housing and retail sales have been quite weak. Here’s the story The Financial Times:
China’s economy expanded 4.7 percent year-on-year in the second quarter, official data showed Monday, below forecasts and a slower pace of growth than in the previous three months. . . . The data release comes as the Communist Party of China’s Central Committee kicked off its third plenum on Monday, a four-day meeting at which the country’s leaders are expected to set the direction of economic policy. The last such event was held in 2018.
Eswar Prasad, an economics professor at Cornell University, said the latest data release would “add strength to the growing clamor for stimulus measures, such as fiscal support for households, as well as broader reforms to foster a more favorable business environment for private companies.”
“Reliance on exports to fuel growth will inevitably lead to increased trade tensions with China’s major trading partners,” he said.
As Western economists continue to recommend more fiscal stimulus, it is increasingly clear that China’s real problem is too much tight policy. Monetary Policy:
In nominal terms, GDP grew by 3.97% in the first quarter and 4.01% in the first half of the year, according to data available via Wind Information.
Before examining the implications of this data, I would like to clarify a few misconceptions:
1. The fact that China’s nominal growth is lower than its real growth is not in itself a problem. One could consider this a “good deflation”, if it is fueled by productivity growth.
2. I have recommended 4% nominal GDP growth for the United States, so I do not consider this figure to be a major problem.
So what is China’s problem? In my view, the biggest problem China has today is not that nominal GDP is growing at 4%, but rather that China’s monetary policy has slowed the rate of nominal GDP growth too quickly. For more than four decades, China has enjoyed much higher nominal GDP growth rates. A sharp deceleration to around 4% has led to economic lethargy. If 4% nominal GDP growth is the ultimate goal, it would have been better to slow the nominal growth rate more gradually.
If the Chinese government decides to maintain faster nominal GDP growth for a few more years – say closer to 5% – it will have to ignore Western calls for fiscal stimulus and focus on monetary policy to boost nominal GDP growth. China already has major debt problems, the last thing it should do is copy the mistakes of the West, where public debt is now on an unsustainable trajectory.
I fear that China is making the same mistakes that Japan made in the 1990s and 2000s. The Japanese government has been unwilling to provide sufficient monetary stimulus, probably because it fears excessive currency depreciation. Instead, it has resorted to massive fiscal stimulus, which has proven to be completely ineffective. Japan has not experienced nominal GDP growth and has instead accumulated a huge public debt. Ironically, there are now signs that Japan is finally emerging from this long period of zero nominal GDP growth, perhaps in part because the government is finally willing to allow the necessary currency depreciation.
Abenomics was announced in late 2012:
