A Slowing Giant

The Chinese government released the official GDP growth rate for the third quarter of 6.9%, which fell below the stated target of 7% for the first time since 2009. The slowing growth of the Chinese economy poses a major challenge to the government as 7% growth is widely believed to be crucial for keeping the unemployment rate constant. If unemployment rates rise there is a serious risk of political ramifications for the government that could pose an existential risk to the ruling party.

To help spur growth the government enacted aggressive measures aimed at bolstering the country’s banks, private industry and small businesses. The People’s Bank of China (PBOC) simultaneously reduced its benchmark interest rate by a quarter percentage point and reduced its deposit rate by half a percentage point. These actions mirror previous previous efforts that the PBOC has enacted to reinvigorate the economy. These measures have had limited success over the past year with the Shanghai Composite Index falling more than 33% from its high and industrial manufacturing falling 8.8% in August from the previous year.

Additionally, since the government reduced both rates simultaneously this may suggest that the underlying problems in the Chinese economy are worse than expected. In a diplomatic cable released by WikiLeaks featuring the current Chinese Premier, Li Keqiag, he noted that GDP numbers are “man-made” and suggested that electricity consumption, bank lending and rail cargo volume are better measures of the economy's health. This has led many economists to seriously doubt government estimates and instead construct their own forecast that indicate GDP growth as low as 1% for 2015.

As the Chinese economy continues to struggle with corruption, excess capacity in the manufacturing industry, and an extreme housing surplus the government will need to take steps to reform and democratize the economy. These reforms will undoubtedly be difficult; however, they are essential for China to sustain its current growth rate.

-Spencer Hanus (NYU Stern '18)