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Misreading Chinese Rebalancing

NEW HAVEN – The punditocracy has once again succumbed to the “China Crash” syndrome – a malady that seems to afflict economic and political commentators every few years. Never mind the recurring false alarms over the past couple of decades. This time is different, argues the chorus of China skeptics.

Yes, China’s economy has slowed. While the crisis-battered West could only dream of matching the 7.5% annual GDP growth rate that China’s National Bureau of Statistics reported for the second quarter of 2013, it certainly does represent an appreciable slowdown from the 10% growth trend recorded from 1980 to 2010.

But it is not just the slowdown that has the skeptics worked up. There are also concerns over excessive debt and related fears of a fragile banking system; worries about the ever-present property bubble collapsing; and, most important, the presumed lack of meaningful progress on economic rebalancing – the long-awaited shift from a lopsided export- and investment-led growth model to one driven by internal private consumption.

With respect to the last point, recent shifts in the composition of Chinese GDP appear disconcerting at first glance. Consumption (private as well as public) contributed only 3.4 percentage points to economic growth in the first half of this year, and an estimated 2.5 percentage points in the April-June period – a deceleration on a sequential quarterly basis that underscores a cyclical, or temporary, weakening in Chinese consumer demand.