This post is a guest contribution by Dr Jay Bryson* of Wells Fargo Securities, Economics Group.
Recently released data showed that the year-over-year growth rate of Chinese real GDP rose from 6.1 percent in the first quarter of this year to 7.9 percent in the second quarter (Figure 1). Monthly data certainly suggested that economic growth in China was picking up steam in the second quarter, so the confirmation that overall GDP accelerated in the recently completed quarter was a pleasant, albeit not totally unexpected, outturn.
Why is the Chinese economy accelerating again? A breakdown of real GDP into its underlying demand components is not available, but monthly data offer some clues. First, foreign trade is starting to stabilize. The swoon in exports in the second half of 2008 and early this year exerted a powerful drag on the Chinese economy. Now that foreign trade is starting to stabilize, Chinese real GDP growth is returning to its underlying “run rate.” In addition, growth rates of retail spending and investment spending have also strengthened over the past few months.
So why are Chinese consumers and Chinese businesses opening up their wallets with newfound vigor? The Chinese government responded very quickly and aggressively to the global financial crisis last year, and the recent acceleration in domestic spending reflects, at least in part, the effects of policy stimulus. The government implemented some modest tax cuts late last year, which may help to explain the acceleration in consumer spending, and its sizable infrastructure spending program is helping to boost investment spending.
Monetary policy was also eased via a number of channels. Not only did the central bank cut its benchmark lending rate by more than 200 bps between September and December but, more importantly, the government rescinded lending restrictions that were put in place in early 2008 when inflation was seen as Public Enemy #1. Indeed, the government has been actively encouraging banks to lend, and its efforts appear to be paying off. As shown in Figure 2, loan growth has simply exploded over the past few months. The current rate of lending growth exceeds the super-charged rates that were registered earlier this decade when the government was attempting to stimulate the economy at that time.
Should we be worried about the strong rate of lending growth in China at present? In its zeal to jumpstart the economy, is the Chinese government sowing the seeds of yet another bubble that will have disastrous consequences for not only China but for the entire global economy?
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Source: Wells Fargo Securities, Economics Group, July 16, 2009.
* Jay Bryson is the Global Economist at Wells Fargo Securities. He joined Wachovia (now a Wells Fargo company) in 1998 to provide analysis on financial markets and macroeconomic developments in foreign economies. Before joining Wachovia, Dr. Bryson was an economist in the Division of International Finance at the Federal Reserve Board in Washington, D.C. From 1989 to 1992, he was an assistant professor of economics at the University of Alabama. He received his B.A. and Ph.D. degrees in economics from the University of North Carolina at Chapel Hill.
