Written by Nicholas R. Lardy, senior fellow at the Peterson Institute for International Economics, from Wall Street Journal Asia:
For several years economic policy makers in Beijing and elsewhere have had an overriding worry: that China has been engaging in headlong investment- and export-driven growth that has fueled inflation, polluted the environment and irritated its trading partners. But in the last several quarters, something new has happened. Partly as a result of the slump in the United States and Europe, China is experiencing its own economic slowdown.
This trend is welcome because it reduces inflationary pressure and distortions in investment associated with excessively rapid growth. It could also lead China to rebalance its own model of economic growth and thus could ease trade pressures. But it brings new challenges. Without appropriate policies growth could fall much further, meaning China would become less of an engine of global growth just when the world needs it most.
China’s expansion from 2003 to 2007 was supercharged by a rapidly rising global trade surplus, propelling growth to a peak of 12.6% in the second quarter of 2007. But the external contribution to China’s growth is now waning as growth slows in its main export markets. In addition, domestic investment is slowing due to a softening property market. Property price appreciation is slowing markedly as sales have plummeted since January, a possible harbinger of absolute price declines. The combined effect of weaker external and domestic investment demand already has pushed China’s growth rate down to 10.1% in the second quarter this year.
