How Should China Respond to the Slowdown?

China’s annual GDP growth slowed to 7.6% in the second quarter of 2012, down from 8.1% in the first quarter and the lowest rate since the second quarter of 2009. The data have dispelled fears of a hard landing for China, but now many argue that China must stimulate its economy further to guarantee 8% annual growth.

BEIJING – China’s annual GDP growth slowed to 7.6% in the second quarter of 2012, down from 8.1% in the first quarter and the lowest growth rate since the second quarter of 2009. The newly released growth data may have dispelled fears of a hard landing for China, but have nonetheless prompted many to argue that China must stimulate its economy further to guarantee 8% annual growth.

Since early 2010, in order to contain inflation and property bubbles, the Chinese government has tightened monetary policy. As a result, inflation fell in June to 2.2%, a 29-month low, and house prices, for which the National Bureau of Statistics unfortunately has stopped issuing official data, seem to be stabilizing, and may even have fallen, albeit modestly.

The slowdown in China’s growth rate is, to a certain extent, a reflection of the success of the government’s effort to rein in the real-estate bubble, as well as of other official policies aimed at rebalancing the economy. The growth rate of investment in real-estate development, which directly accounts for more than 10% of GDP, plummeted by 16.3 percentage points year on year in the first half of 2012. That led to an investment slowdown in many related industries, such as construction materials, furniture, and appliances, causing annual growth in fixed-asset investment to fall from 25.6% to 20.4%.

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