China’s Coming Growth Tests

BEIJING – The most recent official data show convincingly that the Chinese economy has bottomed out, and it is now widely expected that annual GDP growth should reach roughly 7.8% in 2012. This result should come as no surprise.

To rein in rising house prices and pre-empt the inflationary impact of the strongly expansionary fiscal and monetary policies implemented during the global financial crisis, China’s monetary authorities began to tighten financial conditions in January 2010.

Monetary tightening, administrative measures introduced by various municipal governments to stem the run-up in the housing market, and the waning effect of the government’s ¥4 trillion ($642.3 billion) stimulus package resulted in a gradual economic slowdown. While inflation should have eased in early 2011, rising food prices and commodity prices thwarted expectations. Annual growth in the consumer price index peaked at 6.5% in July 2011.

Vigorous liquidity tightening eventually mitigated inflationary pressure, but it also impeded economic growth, which had slowed steadily after peaking at 12.8% in the first quarter of 2010. By the last quarter of 2011, annual growth had slowed to 8.9%, triggering a surge of bearish sentiment about the Chinese economy among foreign pundits.