Why China’s economy is slowing down

China is slowing rapidly and the government is taking only modest steps to try to prevent the world’s second-largest economy from outright contraction.

Why is this important: Although it lags behind the United States in size, the Chinese economy has been the largest source of global GDP growth for most of the past two decades, meaning it is a global engine of growth. profitability of companies, investment activity and demand for raw materials.

Driving the news: A series of disappointing economic updates this week showed that Chinese growth was still sluggish on several fronts.

  • Its industrial sector has again slowed down. Industrial production rose just 3.8% in July from a year earlier – and well below expectations of 4.5%.
  • China’s housing crisis continues to hurt. Fixed investment – of which housing is an important component – grew only 5.7% in the first seven months of the year, compared to the same period in 2021. (In 2021, this figure was 10.3% higher year over year from July.)
  • Nor are consumers picking up the slack. Retail sales in July rose just 2.7% year over year, well below the 5% expected.

The context: In the recent past, faced with a downturn, Chinese policymakers have been quick to turn to proven tools in an attempt to kick-start growth. They understood…

  • Inject money into investment in public infrastructure.
  • Design a borrowing boom to fuel domestic spending.
  • Achieve steep interest rate cuts.

The plot: Despite China’s current economic slump, there are no signs that the government is determinedly trying to sustain growth.

  • In past downturns, the broadest measure of any type of credit to the economy in China – known as “total social financing” – has jumped, a sign that the government wanted to increase debt to offset the meltdowns.
  • A report on Friday showed total social financing was well below expectations as the government seemed unwilling to use a debt-driven boom as a source of growth.

Yes, but: The People’s Bank of China cut interest rates by a miniscule tenth of a percentage point on Monday – a move most analysts say is modest and unlikely to revive economic activity.

The bottom line: The ruling Chinese Communist Party knows that the breakneck pace of Chinese economic growth that has prevailed over the past few decades is unlikely to be matched. But unlike decades past, they don’t seem particularly worried about it.

  • For the rest of the world, this may mean that China will be a less reliable engine of growth in the years to come.

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