At 7.4%, China’s annual GDP growth rate in the past quarter matched some of the lowest growth numbers in China’s recent history. According to our China strategists, the slowdown is due to a combination of both global and domestic factors.
From a global point of view, post-crisis demand destruction has clearly taken a heavy toll on Chinese growth. Deleveraging pressure among American households was a major headwind for exporters. In addition, external demand destruction has exaggerated the overcapacity problem and depressed manufacturing-related capital spending activity, leading to a broad-based growth downturn.
While weakness in global demand is a universal problem, Chinese growth has suffered particularly badly from its excessively tight monetary conditions. Amid fears of lending bubbles and liquidity overflow, the Chinese authorities aggressively tightened credit and liquidity. High borrowing costs have dampened aggregate demand, compounding difficulties for debtors to honor their obligations and amplifying risks in the financial system. Meanwhile, the Chinese currency has also appreciated significantly over the past several years, adding pressure to an already tight monetary environment.
All of this has become a major detriment for corporate profits and business activity. Taken together, high borrowing costs and an expensive RMB have choked off margins, leading to tremendous difficulties in some low-margin export-oriented sectors.
In short, global headwinds and self-imposed policy restraints have been the main reasons behind China’s growth problems in recent years. By the same token, improvement in the global outlook and prospects for some policy loosening, even marginally, should be good news. In the past several weeks, China’s policy settings have clearly shifted toward growth boosting. Meanwhile, we expect continued improvement in global demand, especially from developed economies. This should help the Chinese economy stabilize and strengthen in the coming quarters.