China Is Now Growing Slower Than the U.S.
This is an unprecedented situation. What are the implications?
China has consistently been one of the fastest-growing economies in the world for more than forty years. Now it is not. Stagnant consumer spending, the ongoing collapse of housing market speculation, and the end of the boost from foreign demand for manufactured goods have combined into a severe slowdown.
Moreover, this is happening during a relatively benign global economic environment. While the latest retail sales numbers in China show that spending excluding petroleum and products has been rising less than 3% a year before accounting for price changes, in the U.S., retail sales excluding gasoline stations is rising at a 7% yearly rate.
This unprecedented disconnect helps explain the yawning gap between Chinese and U.S. shorter-term interest rates, the exodus of foreign investors from China’s bond market, the collapse of new foreign direct investment flows into China, and the downward pressure on the yuan’s exchange rate (relative to the U.S. dollar, anyway). It has also provided fodder for some interesting discussions about China’s longer-term trajectory.
My overall understanding of the situation has not changed much since last month—also check out my conversation with Michael Pettis about it—but I do have some updated and additional charts to represent what I believe is happening.