Some of the last words I hear before nodding off to sleep most nights here in Shanghai are uttered by a pasty-faced guy in the United States, nattering on CNBC about how the sky is falling (economically speaking) in China. I've become somewhat inured to the inanities of cable television -- you'd go insane if it were otherwise -- but in these days of hyper-concern about the global economy (quite legitimate concern mind you, given the unfolding debacles in Europe and the United States), it's useful for everyone to take a deep breath and put China's current slowdown in some context.
China's economy for the past year has been slowing out of necessity. Its consistent 10%-plus real GDP growth rates for most of the past decade had contributed to a broad inflation, as well as severe distortions in the economy's composition (a significant over reliance on fixed asset investment as the driver of growth). The government tightened policy as a result, and put shackles in particular on the residential housing market, which was at once overbuilt and still unaffordable for the vast majority of Chinese, thus contributing to social tensions here. (Overbuiltand overpriced is, to be sure, an economic oxymoron, but we'll leave the explanation for that for later.)
The tightening measures worked, arguably a bit more than the government intended, as it became clear in the first two quarters of this year that China was decelerating rapidly. Prime Minister Wen Jiabao in March officially lowered the government's growth target for 2012 to 7.5%, and that should be considered a target that Beijing will be lucky to hit this year. The data these days -- industrial production, electricity consumption -- are weak, and the global slump in commodity prices, with inventories piling up in everything from coal to iron ore to crude oil, is obviously closely tied to macro weakness in China. It's the unwinding of the decade-long, China-driven bull market in commodities that is now over.
Part of the China slow-down is driven by the disaster in Europe -- what polite economists call a "recession," but which is, let's face it, nothing less than a depression in countries like Greece and Spain. Europe is China's biggest trading partner, and China is plainly not immune to its deepening pain. The U.S. is China's second-largest trading partner, and its weakening economy is obviously not helping China's growth, either.
So a government-led deceleration, which was necessary, now has weakness in external demand added to it, and the result is not pretty. That's particularly true for companies the world over that convinced themselves that China would grow at 10% per year forever, and scaled up capacity accordingly. Expect earnings disappointments from multinationals everywhere with big China businesses to increase.
But, having said all that, it's critical not to exaggerate the current weakness. China is not in free fall. The macro issues it confronts pale in comparison with those now front and center in Europe and the U.S. Remember, first, that China can no longer accurately be characterized as an "export led" economy, so the damage the outside world can do is limited. Beijing's current account surplus as a share of its economy is now slightly less than 3%. That's down from 10% eight years ago. The unfolding economic debacle in the developed world is wounding China, but not killing it.