Policy Alert #30 | July 29, 2012

This month, the International Monetary Fund published a report projecting that China’s economy is heading toward a “soft landing.” Although growth is expected to remain around 8% at least this year, the report created a stir. This Policy Alert summarizes recent Chinese and American commentary on China’s economic prospects.

CHINA

The main message in the officially-sanctioned press is that China’s economic slowdown is a normal result of ongoing efforts to restructure the Chinese economy and stimulate domestic demand.

• There is “no need to panic about slowdown in China,” ran the headline of a People’s Dailyeditorial, while the more Hard Nationalist Global Times prescribed the following: “China’s economy must create more jobs, boost consumption by increasing individual incomes, and improve social harmony my reducing income disparity.”

• Additional coverage and commentary on China’s economic restructuring cited positive projections by an International Trade Centre director, a Malaysian economist, and an American academic. A report on recently released job figures also emphasized “China’s improving ability to create jobs even in times of economic slowdown.”

UNITED STATES

U.S. opinion on the Chinese economy varied, with some predicting a fall of “apocalyptic” proportions, while others took a more optimistic stance.

Several experts took the IMF’s “soft landing” forecast one step further, predicting a “hard landing” as outlined in a recent article in Barron’s:

• Edward Chancellor, a global strategist for the global investment management firm GMO, added that “I can’t tell you precisely when the downturn will hit. No one can. All I know is that China has all the earmarks of a classic mania that will end badly-a compelling growth story that seduces investors into ill-starred speculation, blind faith in the competence of Chinese authorities to manage through any cycle, and over-investment in fixed assets with inadequate returns facilitated by an explosion in credit.”

• “Businesses are taking fewer loans. Manufacturing output has tanked. Interest rates have unexpectedly been cut. Imports are flat. GDP growth projections are down, with some arguing that China might already be in recession,” contended an article entitled “Five Signs of the Chinese Economic Apocalypse” in this month’s Foreign Policy magazine.

Nonetheless, others remained optimistic about China’s growth prospects.

Steve Rattner, former counselor to the Treasury secretary, noted that “China’s economy still pulsates with the confidence of its growing entrepreneurial spirit, an important factor that doesn’t fit neatly into statistical models.”