BEIJING – After three decades of 9.8% average annual GDP growth, China’s economic expansion has been slowing for 13 consecutive quarters – the first such extended period of deceleration since the “reform and opening up” policy was launched in 1979. Real GDP grew at an annual rate of only 7.5% in the second quarter of this year (equal to the target actually set by the Chinese government at the beginning of this year). Many indicators point to further economic deceleration, and there is a growing bearishness among investors about the outlook for China. Will China crash?
In fact, many other rapidly growing emerging economies have suffered – and worse than China – from the drop in global demand resulting from ongoing retrenchment in high-income economies since the 2008 financial crisis. For example, GDP growth in Brazil has slowed sharply, from 7.5% in 2010 to 2.7% in 2011 and to just 0.9% in 2012, while India’s growth rate slowed from 10.5% to 3.2% over the same period.
Moreover, many high-income newly industrialized economies (NIEs) with few structural problems were not spared the effects of the 2008 crisis. South Korea’s GDP growth slowed from 6.3% in 2010 to 3.7% in 2011 and to 2% in 2012; Taiwan’s fell from 10.7% to 1.3% over this period; and Singapore’s plummeted from 14.8% to 1.3%.
Given this, China’s economic slowdown since the first quarter of 2010 has apparently been caused mainly by external and cyclical factors. Facing an external shock, the Chinese government should and can maintain a 7.5% growth rate by taking counter-cyclical and proactive fiscal-policy measures, while maintaining a prudent monetary policy. After all, China has high private and public savings, foreign reserves exceeding $3.3 trillion, and great potential for industrial upgrading and infrastructure improvement.