China is the Real Story

In recent months, fears have been mounting that the Chinese economy was in the midst of a slowdown that had the potential to be much worse than was previously feared.  In fact, much of the economic data coming out of China in recent months suggested that China’s slowdown was accelerating, highlighted by the turmoil on China’s stock market in recent weeks which resulted in major declines for share prices in China that wiped $3 trillion off of share prices there.  However, the economic results for the second quarter of this year in China have proven to have been slightly better than most economists had expected, raising hopes that China would continue to avoid a serious economic slowdown and that a crash landing for the Chinese economy could be avoided.  Given the state of the global economy at this time and the vital role that China now plays in the global economy, this was very welcome news.

As in the first quarter of this year, the Chinese economy expanded by 7.0% on a year-on-year basis in the second quarter of 2015, slightly beating expectations.  While these numbers were greeted with no small measure of skepticism given the recent run of poor economic data in China, it is clear that the Chinese economy is not in a steep decline at present, as some analysts had begun to fear.  On the positive side, domestic demand levels in China continue to rise, despite the recent stock market turmoil and the weakness of China’s once-vibrant real estate sector.  Growth would have been higher had it not been for the recent decline in export revenues that have resulted from China’s loss of export competitiveness in recent years and the lingering weakness of a number of China’s key export markets.  Altogether, China appears to be on track to meet the 7.0% GDP growth target for the year in 2015 set by the Chinese government late last year.

While much of the world’s attention has been focused on the uneven economic results in the United States in recent months and Europe’s mishandling of the latest Greek debt crisis, it is the Chinese economy that has the greatest potential to either boost the global economy or to add to the turmoil that has plagued the global economy so far this year.  If China can maintain economic growth rates of between 6.0% and 7.0% over the next five years, it is estimated that the Chinese economy will account for 23% of global economic growth between now and 2020, more than the United States (17%) and the European Union (9%).  Looking further ahead, if China’s economy can maintain growth rates in excess of 5% over the next 15 years, than the Chinese economy is forecast to account for 25% of global economic growth between the years 2020 and 2030, more than the US (14%) and the EU (8%) combined.  As a result, China has emerged as the leading pillar of economic growth over the past few years and, barring a total collapse of the Chinese economy, will account for an ever greater share of all economic growth in the world in the years ahead.  As such, it is imperative that China avoids a hard landing in the near future as the fragility of the world’s other leading economies means that there is little room for error in terms of managing the Chinese economy.