China GDP: Slower Chinese GDP Growth Bodes Well For Global Economy
The news media is all atwitter over China’s first quarter GDP number. No matter where you look, some pundit claims China’s first quarter GDP growth spells doom for China and the global economy.
It’s shock journalism of the most shameless variety.
At first blush, the news certainly looks grim. The world’s fastest growing major economy grew at a slower pace than most experts expected. And it was the weakest quarter of growth in nearly three years.
However, I disagree that China’s first quarter GDP means we’re headed for a global slowdown or recession. In fact, I think it means just the opposite.
Here’s why…
The Chinese government spent most of last year trying to slow the country’s red hot economic growth. Remember, China’s financial crisis stimulus spending and easy money policies had spurred several quarters of 10%-plus GDP growth. And this in turn had begun driving a new cycle of inflation.
Nothing is more dangerous to an economy than rampant inflation…
Clearly, China had no choice but to apply the brakes in order to prevent inflation from taking off. Out of control inflation would have been a much more dangerous scenario for the global economy than a few quarters of slower growth.
The point is…
It should come as no surprise that the Chinese government’s efforts to slow their robust economic growth did in fact slow economic growth. In fact, the so-called experts should be applauding the government’s success… consumer prices have been falling and inflation appears to be under control.
The more important question is did the Chinese go too far in trying to cool their economy? In other words, did they slow growth so much that China is now irreversibly on track for a hard landing?
While it remains to be seen, I think not…
China has already taken its foot off the brake and gently reapplied it to the accelerator. The government cut bank reserve ratio requirements for the first time in three years in November 2011. And they’ve cut them two more times so far this year.
Cutting bank reserve ratio requirements is an indirect way of stimulating economic growth. It’s less direct than cutting interest rates for sure, but the policy is a sound way to spur major increases in bank lending.
And of course, increased lending to businesses is a surefire way to stimulate economic growth.
In fact, we’re already seeing a surge in lending by Chinese banks.
According to the Wall Street Journal, the banks issued new loans of over 1 trillion yuan ($160 billion) in March. A huge increase over the 710 billion yuan in loans issued in February.
What’s more, the slower growth in first quarter GDP frees the Chinese government to lower reserve ratio requirements even further. In fact, one fund manager believes the government will cut them three or four more times by the end of 2012.
And here’s the best part…
China’s easier money policies are already having their intended effect. Interest rates are coming down… and fast. The Journal reports that Chinese interbank lending rates dropped from 4.5% in January and February to 3.3% in March and April.
No question about it, the Chinese government’s efforts to stimulate growth are already working.
Now, GDP may continue to slow over the next quarter or two, but it’s just a matter of time before the trend reverses. We should see China’s GDP growth increasing again before the end of the year. And when that happens it will help drive faster economic growth worldwide.
Category: Foreign Markets
