Adam Carr does China

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From Adam Carr today:

Consider that in 2014 the Chinese economy is expected to show the largest expansion on record; GDP set to rise by nearly $1.5 trillion (on a PPP basis) after a $1.37 trillion lift last year. For comparison, this is 22 per cent above what we saw during the ‘mining boom’, in dollar terms, and about 40 per cent above what we saw in the few years prior to the GFC — a time when China’s economy grew on average by $955bn per annum. This highlights an important point — China’s relative importance to global growth is much higher now than it was pre-GFC. Thirty cents of each and every dollar that the world produces comes from China now. That compares to an average of 18 cents pre-GFC — when the Chinese economy had growth rates as high as 12.4 per cent! Which matters more?

…Now none of this changes the fact that commodity prices are off — bringing all the troubles we hear so much about. It can’t be said however, that any of this is due to China, because to all intents and purposes the Chinese economy is not slowing.

That’s some striking Pasconomics. For perspective, let’s revert to global fund manager and macro doyen Gavyn Davies at the FT:

It is very striking that western commentators and investors have become extremely sceptical about any good news emanating from the Chinese economy…Although this latest news clearly reduced the danger that China is entering a hard landing as the property sector adjusts sharply, many headlines proclaimed, correctly, that the economy is now growing at the slowest pace since the last recession. So is China bouncing back from a weak patch of growth, or is it headed for a prolonged slowdown lasting many years?

Actually, both are probably true. Cyclical fluctuations are occurring around a clearly slowing long-term trend for growth, and this can defy simple good news/bad news interpretations. At present, it seems that the latest cyclical slowdown is being controlled, despite the property crash.

…The next few months will be crucial. The shake-out in the property sector will continue and, according to Goldman Sachs, this might reduce the contribution of housing investment to GDP growth from 1.8 per cent in 2013 to about 0.3 per cent by next year. This hit to growth has been met by a major easing in monetary conditions, which started in February and is still under way. Fiscal policy is also being fine tuned to ensure that the imploding housing sector does not cause a hard landing for the economy as a whole.

…But what about the longer term?…The reasons given by forecasters for these large markdowns in China’s medium-term growth projections are familiar [over-investment, debt, slowing urbanisation, financial reform].

…In assessing Chinese growth data, investors therefore need to juggle with two different forces. First, the long-term trend growth rate is probably slowing from about 7.5 per cent now to, at best, 6 per cent by 2020 (with a lot of uncertainty around that). Second, there will be cyclical fluctuations around that trend, which the authorities will seek to smooth through policy changes.

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One of these two discussions of slowing Chinese growth makes more sense than the other.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.