China Economy slows

China Economy slows

China is slowing. Now the second-largest economy, the East Asian giant has to ease its pace to keep from stumbling in its quest for prosperity. The National Bureau for Statistics released numbers today showing annual GDP growth in Q1 2012 of 8.1%, a continuation of the two-year slowing trend that follows the post-crisis rebound.

China cannot grow faster than the world economy indefinitely because it would eventually become bigger than the world. Beyond this mathematical truism, the country’s rising size also means that it is starting to encounter other, more practical constraints to its expansion. Most of the local population is now fully employed in productive enterprise rather than subsistence agriculture. Sites for industrial development are eating into scarce farmland. A more complex economy, an increasingly educated population and less censorship are straining an archaic political system.

Building up its infrastructure so quickly – we’re witnessing the largest ever boom in human history – means that the hunger for raw materials has transformed commodities markets . The current high energy, metals and food prices are partly the result of an unprepared global economy. As producers get used to the new reality and expand capacity, prices should fall back to underlying cost – although these very cost are rising.

Another constraint is that outsiders simply cannot keep buying more and more Chinese products if they’re to produce any value themselves to pay for imports. Lower export growth is the inevitable result. Lastly, the domestic economy is largely driven by investment. i.e. more capacity to serve a bigger economy. The problem is that demand must ultimately fill that capacity. But to some extent, concerns about excessive investment are overdone because the capital stock per person is still fairly low. Also, rising wages and strong retail sales growth – up a strong 15.2% year on year in March – show that the economy is on the right track.

Amid many constraints China is learning to walk with its own momentum rather than running to satisfy external demand. Slower GDP growth is a sign of this. The rest of the world should be glad because the slower it goes the less likely China is to stumble and crash, crushing global growth in its fall.