Making sense of China’s GDP slowdown

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Making sense of China’s GDP slowdown


Mohamed El-Erian

China’s release of its lowest growth rate in six quarters is triggering quite divergent reactions this morning among market analysts - from those who view it as confirmation of a secular growth slowdown in China’s bubble-prone economy, to those who see it as evidence of a potentially successful reform movement by those stewarding the world’s second largest economy.

Predictions about the implications of a China slowdown for the rest of the world are also all over the map. Some feel that this will inevitably lower global growth and increase the risk of financial instability; others deem it part of a much-desired global rebalancing that puts the world on a more solid economic footing.

Here are five considerations to take into account in seeking to strike the right balance between all of these dissonant assessments:

? First, GDP is but one data point, and, notwithstanding the attention it gets, it is not really such a good one.

At 7.4 percent, China’s economic growth is the lowest in a year and a half. But China’s GDP, as a metric, suffers many limitations, including accuracy problems that potentially undermine confident assessments that many are tempted to make (or feel forced to do so) based upon it. It also does not capture some of the specifics that are central to both the bull and the bear case for China - most importantly, the underlying state of the credit markets, including implications for the future functioning and stability of the economy.

? Second, a slowdown in GDP can be part of either a good or a bad economic story for China.

Both bulls and bears expect a slowdown in growth. Indeed, even the Chinese leadership has stated that lower growth is part of a successful internal rebalancing of the economy - one that seeks to replace an increasingly exhausted growth model, based on exports and public investment, with a more dynamic one driven by sustainable internal private demand. In this regard, the internals of today’s number are ambiguous when it comes to assessing whether this is a “good” or “bad” slowdown.

? Third, the GDP number signals very little about China’s policy intentions.

With Chinese policy makers still possessing quite influential tools, including direct economic and financial instruments and the type of moral suasion that many others lack, much of the analysts’ disagreements about China could be informed by a better assessment of what lies ahead on the policy frontier. GDP growth is part of that calculus, but an increasingly less important one. Moreover, today’s number as a standalone is neither strong enough nor weak enough to trigger a new policy response.

? Fourth, GDP growth is an intermediate policy target - not a final one.

For economic, political and social reasons, China’s main policy objective is employment; and, again, growth per se is a gradually less important determinant factor.

? Finally, there are many other moving pieces in the global growth debate.

While China has undoubtedly served as a strong global economic locomotive, especially in the aftermath of the 2008 global financial crisis, expectations are for this role to diminish going forward. More of the heavy lifting is expected to be borne by the U.S. and Europe - and indeed, needs to be borne by those economic powerhouses. That shift will optimally occur in the content of a proper rebalancing of global growth engines and an orderly, gradual normalization of experimental monetary policies.

The bottom line is a simple but important one: China’s latest GDP number is but a small piece of a complex and still-uncertain mosaic. Markets would be well advised not to make too much of it, one way or the other.

By Mohamed El-Erian, Chief economic adviser at Allianz and chairman of Barack Obama’s Global Development Council.

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