China’s growth has held up well so far in 2008 (take a look at the Bank's Quarterly Update for more details). Growth rate for the first half was slightly over 10%. Recently there has been concern about the slowdown in the growth of exports: from 28% year-on-year increase in May to 18% in June. But monthly figures are erratic, and I am more impressed that the growth of exports for the first half was at a 22% rate, about the same as in the last part of 2007. So, for the moment the slowdown in China – from nearly 12% growth in 2007 – is a healthy easing to a more sustainable rate of growth.
Still, there are some things to be concerned about on the growth front. Normally I would not expect the Olympics to have much direct effect in a large economy. But, anecdotally, I am hearing a lot of stories from the business community about difficulties in getting visas, extra security and hence delays at ports, and transportation bottlenecks in some locations. Since most of the manufacturing production is in the South of the country, far away from the main Olympic locations, there may not be much aggregate effect from these temporary dislocations. But it is also possible that the dislocations will have a modest, negative effect on production and exports.
There is also the fact that for two weeks the whole labor force is going to be distracted to some extent. But if firms find themselves at the end of the Olympics somewhat behind their production goals, it is likely that they will work extra hard to catch up. So, for the whole year 2008, I would be surprised if the Olympics had much effect on production and exports.
A much greater concern should be the state of the U.S. and world economies. China has become a big player in world trade so that in the long run it is not realistic for its exports to continue to grow at rates of 20% or higher. Intuitively, if you already have a big share of the market, and the market is growing at 6%, it is not possible to sustain export growth of 20%. And, to make matters worse, world trade growth is slowing down to more like 4%, so that hastens the necessary adjustment for China. China’s exports have held up surprisingly well so far, but it is likely that there will be further slowdowns ahead. If this is gradual, then the change will be positive, helping China to reduce its unsustainably large trade surplus. But if there is a more abrupt slowdown, then that is likely to spill over to domestic confidence and consumption.
The year 2008 remains a challenging one for China macroeconomically, not because of the Olympics, but because of the weakness and uncertainties in the global economy.