Summary: Continuing our quest to understand events at the other pole of the world economy, today’s post by A-team economist George Magnus explains the 3 key things to know about current events in China.
China’s economy: no collapse, but it’s serious, and so are the politics
By George Magnus, 1 September 2015
Reposted from his website with his generous permission
For the sake of clarity, repeat three things after me:
- China’s economy is not collapsing.
- What’s going on China is serious.
- Political tensions are making things worse.
(1) China’s economy is not collapsing
People who have become China experts in the last few weeks, point to the sharp falls in power consumption and freight traffic – two of the three indicators in the now famed Li Keqiang index –- but these and other industrial indicators don’t tell us anything about what’s going on in the services or tertiary sector, which accounts for about half of the economy.
Even if producers are having a tough time at the moment, consumers of household goods and services and buyers of real estate haven’t gone to ground. Retail sales were still up by over 10% in July, and property sales registered pretty robust year on year increases of over 13% in the second quarter and 19% in July. The government is going to continue to support the economy with infrastructure spending, monetary easing, and fiscal and debt initiatives.
In August, even though the Caixin and NBS PMI data were down, some of the high frequency data could ‘look’ better in year-on-year terms, largely because of flattering base effects following from declines this time last year. The official data are likely to continue to show the economy growing around 6.5 – 6.8% in annual terms in the next few quarters.
(2) What’s going on China is serious
The economy is the fourth year of a structural slowdown that shows no signs of ending and is becoming increasingly insensitive to the government’s stimulus measures. This chart of the manufacturing, services and total PMI indices in August captures the situation well, and points specifically to the fact that the services component, which still shows expansion, isn’t doing enough to offset the decline in manufacturing.