If you had any doubt that North American stock markets have been propped up by rosy prospects for China’s economy, today should teach you a lesson.
The day after China announced that its new annual target for gross domestic product growth has been set at 7.5 per cent, the slowest rate in 22 years, stock markets are taking a beating. With the euro zone back in recession and the U.S. economy making a very slow recovery, China was supposed to be the big bright spot.
But here’s the real question: Are we making too much of this lower growth target? Is it really that big of a deal?
For starters, while economic expansion is expected to be weaker, it’s still growth. Plus, the 7.5 per cent rate is off a bigger economic base than what existed a year ago.
More importantly, though, remember that China wants slower growth – or at least more stable expansion.
Stephen Roach, Yale University faculty member and former chairman of Morgan Stanley Asia, took to the opinion pages of the Financial Times to stress that we underestimate how well the Chinese government can manage this expansion. “Contrary to widespread concerns over an imminent hard landing, China will defy the naysayers,” he wrote.
His argument is based on a few key points, the first of which is a reminder that China had to slow growth to control inflation. Since implementing a number of measures, he pointed out that the headline consumer price index fell from 6.5 per cent in July, 2011 to 4.5 per cent.
Second, China’s bank reserve ratios are sky high and can easily be lowered if growth needs to be kick-started. That’s quite different from the situation the Federal Reserve faces because its interest rates can’t go any lower and a chunk of newly printed money is already sloshing through the U.S. economy.
“China is cut from a very different cloth than the advanced economies of the west,” Mr. Roach noted. “Long focused on stability, it is more than willing to accept the short-term costs of a growth sacrifice to keep its development strategy on track.”
Still, no one can deny that unrest is growing within China. With growth targeted at 7.5 per cent, it’s only about half of the annual peak pace of 14.2 per cent set in 2007. And as The New York Times notes there are some very “sobering signs of slower growth” across the country.
Example: “Construction sites across Guangzhou used to be floodlit, so that work could continue through the night on the forests of new residential and office towers reaching toward the stars,” the story noted. “But now, during a nationwide real estate downturn, builders are not starting projects or scrambling to finish ones already under way, so there is little need for night-work illumination.”
On top of that, workers are getting restless. They’ve tasted strong growth and have seen their standard of living improve. Now they want more, including better worker protection and higher wages. No matter how brilliant the government officials may be, they might miss the warning signs of a revolt.