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China’s growth surprises on the downside

David Dollar's picture

Although exports have slowed down, they contributed to China's GDP growth in 2008. But in this gloomy global economy, some factories will close and workers will lose jobs as it slows down further.
China’s growth rate in the third quarter fell to 9.0%, the lowest rate since the SARS crisis in 2003. Everyone expected that the global slowdown and disruption from the Olympics would take some of the froth off China’s economy. But the median forecast among specialists who follow China was 9.7%, so it is fair to say that the drop was a big surprise.

The details of the third quarter report provided some good news. Exports are slowing gradually, but still contributed to the GDP growth in 2008. Retail sales growth hit its highest level in nine years and was at 18% in real terms in September. So far, Chinese consumption is holding up. And the easing of inflation to under 5% means that the government has scope to loosen monetary and fiscal policy. The government is planning to respond to the potential for further growth declines with accelerated spending on reconstruction of the earthquake-affected areas and with infrastructure projects more generally.

Because China saved during the boom times—through a fiscal surplus and through reserve accumulation—it has considerable scope to stimulate its economy if the global slowdown threatens a hard landing in China. While China’s policy toolkit can probably keep the economy growing above 8%—a rate that will be envied elsewhere—nevertheless there will be a bumpy ride for the next few years.

Further slowdown of China’s export growth is inevitable in this gloomy global economy. The only question is how fast the slowdown will be. Some factories will close and workers lose their jobs—it’s already happening in the toy industry and other light manufacturing in Guangdong’s cities. Stimulus will help, but not those specific firms and workers. It will be other activities that expand, because domestic investment and consumption are not made up of the same products that China exports. This adjustment is necessary, and if it happens gradually it does not have to be too painful. But rapid adjustment is always a problem. So, in addition to macro stimulus, China needs to strengthen its safety net programs that support people in transition. A lot of effort has gone into strengthening social programs in recent years, so this would be a good time to put more money into some of these programs.

By coincidence we are opening the second China Development Marketplace (CDM) the day after this sobering third quarter report was released. CDM will showcase 117 civil society organizations (CSOs) that are the finalists chosen by an expert group and by online voting. Many of the projects focus on earthquake-affected areas. Others deal with important social and environmental issues. During a time of difficult adjustment, CSOs can help some of the people who have not benefited much from the boom and who are especially vulnerable during the downturn. And CSOs can help keep the focus on long-term issues such as environmental cleanup that can easily be forgotten as short-term problems take center stage. Fortunately we did all the fund-raising before this slowdown took hold, raising over 7 million RMB (over $1.1 million), mostly from the corporate sector. So the development marketplace will be able to make small grants to about 50 winning projects.

If you happen to be in Beijing, come by the colorful exhibition in the China World exhibition center on October 21-22.