Economics, International economy

Financial crisis hits Chinese growth

Chinese GDP Growth Slows to 7.6%

Photo Credit: Daniel Foster -- www.pcfastlane.com

If you thought the negative fallout from the financial crisis was waning, think again. Last Friday, China posted a weak second quarter year over year GDP growth rate of 7.6 percent. That’s close to stall speed for China and down from the first quarter’s growth rate of 8.1 percent. Electricity production in June, viewed by some as a more reliable indicator of Chinese growth, was reported unchanged from a year earlier. China’s rapidly falling year over year inflation rate (down to 2.2% in June from 3% in May) is another indicator of weakening demand growth in China.

There have been other hints of a sharper slowdown in China. The Markit purchasing manager’s index, which has been weaker than the official Chinese PMI, and a better predictor of future activity (see March Economic Outlook) fell again in June. And China has been letting its currency weaken over the past several months, a sign that China is hoping to boost export growth with a weaker currency.

Slower growth in Europe and the United States, not to mention sharply slower growth in other major emerging market countries like India and Brazil, has cut Chinese exports to a point where net exports are a drag on growth. The European growth slowdown has been made worse by this year’s re-intensification of Europe’s financial crisis, which has also contributed to a mid-year U.S. growth slowdown. So China can be described as being hurt twice by financial crises: first by the Lehman crisis in 2008 and second by the European financial crisis in 2011-2012.

Had China not chosen to peg its currency by purchasing dollars and Euros and thereby feeding the growth of financial bubbles in America and Europe, the financial imbalances that contributed to the financial crises in those countries would have been less severe and their exports today would be stronger. China traded more exports in the bubble years for fewer exports in the post bubble years. Better to have left currency intervention out of the policy mix and let exports—not to mention financial markets and its economy—follow a more stable path.

One thought on “Financial crisis hits Chinese growth

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