China Lands Softly

There’s been consensus for at least a year now that China’s rate of growth will inevitably contract from 2011’s pace of 9.3%. What’s less obvious is how severe the slowdown will be; predicting is notoriously difficult because of the lack of GDP data from the Chinese government. Still, the outlines of what’s being called a “soft landing” and its consequences are becoming clear: China’s growth is expected to decelerate to 7.7% this year.

With much of Europe in recession and recovery in the United States only beginning to show signs of strength, a strong Chinese economy has been critically important for the global economy. In the United States, reduced demand from China is estimated to have lowered American growth by 10 to 20 basis points in the second quarter (a small amount but a fairly large percentage of the 1.3% annualized rate for the quarter), and to be responsible for the loss of 38,000 manufacturing jobs since July.

China is the third-largest buyer of American goods after Canada and Mexico, accounting for 7% of worldwide American exports. Chinese demand is not only a major driver of American manufacturing but also a major factor in the rise of prices for American commodities like coal, paper, and many metals. The cooling of the Chinese economy can be expected to have further short-term effects on U.S. employment growth and profits, and long-term effects on the success of the American recovery.

China, of course, isn’t sitting idly by while growth slows. It has long-term goals of shifting its economy away from heavy reliance on exports and toward domestic-driven growth, and of liberalizing its capital markets to create efficiencies that spur innovation in the economy at large. China’s ability to manage change is hampered, however, by rising labor costs and an aging population, and by the once-a-decade turnover of its leadership that happens at the beginning of November.

Some have an image of China as a centrally managed monolith. It isn’t, though, or it wouldn’t have accomplished the greatest modernization in the history of the planet. It will be interesting to watch how the country and its political and business leadership deal with the first hiccup in that extraordinary growth. Stay tuned.