China’s rate of growth is slowing. First quarter GDP growth stood at 8.1%; second quarter GDP growth was 7.6%. A continuation of the current trend will make it next to impossible for China to hit its growth target of 7.5%. The Chinese leadership has announced dozens of new infrastructure projects in the hopes of stimulating the economy. This has worked in the past in combination with robust global investment. It will be interesting to see if the stimulus without foreign investment approach can work this time.
The problems are dual in nature. Exports account for about one quarter of GDP and the growth rate in exports has fallen from year-over-year growth rates of 11.3% in June to about 1.0% in July. Internal consumption has also fallen off as evidenced by a decline in imports.
I have no doubt that China will overcome this short-term problem, especially as the US and Europe experience increased economic activity in 2013.
What the current situation shows is the foolishness of previous straight line forecasting. Do you remember forecasts from just a few years ago that said China was unstoppable? How about the dire predictions of how China would be larger than the US by the middle of this decade? The reality is that near-sourcing, productivity enhancements, and cost realignments are all working in favor of the US and that a positive view of the future here is well placed.
