Rate of Chinese Growth Slows

By: Dr. Mike Campbell

I almost feel embarrassed by the choice of headline for this piece, but figures show that the rate of growth in the world’s third largest economy has slowed in Q2 from a whopping 11.9% in Q1 to just 10.3% in the last quarter. This reduced level of growth still massively outstrips anything seen in the world’s most highly developed countries.

The Chinese target for annual growth is 8%, so the most recent data still exceeds this level. The reduction has been attributed to the fading influence of the massive expansion of low cost bank lending that the government ordered last year as a stimulus package to stave off the worst of the global recession. This injection of cheap cash has helped to fuel a real estate bubble and provide Chinese businesses with liquidity. The government has made some moves which are designed to clampdown on property speculation and head off the property bubble before it inflates beyond control, and to restrict local government borrowing.

The data also reveals that manufacturing output declined from 16.5% in May to 13.7% last month; a larger fall than analysts had anticipated. Over the same period, inflation has also dropped from 3.1 to 2.9%, again surprising analysts who had expected it to rise to 3.3% for June. This decline in the inflation rate means that the pressure on the Bank of China to raise interest rates has eased since the target inflation level is 3%. On the other hand, demand for retail goods in China continues to rise which may cause further inflation. The growth in retail demand is currently at about 18% per year. This should mean that China will import more goods from the rest of the world to meet this demand, thereby helping to stimulate the global economy somewhat.