Has the Chinese Economy Pulled Off a "Soft Landing?"

The slowdown in China reflects a deliberate policy choice by Chinese authorities. The stronger-than-expected outturn in Q1 may relieve some concerns that a “crash landing” is imminent. 

Year-over-Year Growth a Bit Stronger Than Expected in Q1

Recently released data show that real GDP in China rose 1.4 percent (not annualized) on a seasonally-adjusted basis in Q1-2014, slower than the 1.7 percent increase that was registered in the final three months of 2013. On a year-ago basis, real GDP was up 7.4 percent, which represents the slowest growth rate in six quarters (top chart). That said, the year-over-year outturn was a bit stronger than most analysts had expected. 

A breakdown of the overall GDP data into its underlying demand-side components is not available at this time, so it is difficult to pinpoint the exact sources of the slowdown. However, monthly data offer some clues. For starters, external factors appear to have contributed to the deceleration in the Chinese economy as export growth in the first quarter was very weak (middle chart). Moreover, growth in investment spending, which has been a main driver of Chinese GDP growth, also appears to have slowed. Fixed investment spending was up 17.6 percent in the first three months of 2014 relative to the same period last year, the slowest year-over-year rise in more than a decade. 

The slowdown that is underway in investment spending reflects a deliberate policy choice by Chinese authorities. The Chinese economy has become unbalanced over the past two decades with gross capital formation (GCF) accounting for more than half of Chinese GDP. (In the United States GCF accounts for less than 20 percent of U.S. GDP.) Excessive capital spending can ultimately lead to a very painful bust in the economy if the investment projects turn out to be unprofitable. Therefore, the Chinese government has taken steps to slow the lending growth that is the fuel for capital spending. Directives to the country’s banks to rein in excessive lending have caused traditional loan growth to tick down thus far in 2014 (bottom chart). The aggregate amount of “total social financing,” which captures the broadest measure of financing in the Chinese economy, rose by CNY 5.6 trillion in the first quarter. This increase in Q1-2014 was 9 percent less than the rise that occurred during the same period last year. Financing in China is not contracting, but growth in lending is clearly becoming more constrained.  

The rebalancing of the economy that Chinese authorities are attempting to engineer won’t be easy, and it probably is premature to claim that the government has indeed pulled off a “soft landing.” However, the stronger-than-expected GDP outturn for the first quarter may relieve some concerns  that a “crash landing” is imminent. The Chinese government could even announce some modest policy easing in coming weeks. However, a return to the double-digit growth rates that characterized the Chinese economy in the past decade is not in the cards.