NCPA - National Center for Policy Analysis

Is China Slowing Down?

April 18, 2012

China's economy has grown substantially over the past few decades to the point that it is now the second-largest in the world.  But with this maturing economy and growing role in global financial markets, China will need to make vital changes for its own benefit and that of its trade partners, says John H. Makin, a resident scholar at the American Enterprise Institute.

The uneasiness with which China has entered 2012, in which its growth outlook does not appear as strong as it once did, underlines the need for fundamental reform.

  • The March purchasing manager's index estimate from HSBC Holdings was reported at 48.3 in late March, a four-month low that is down substantially from last year's level of 52 -- this will likely undercut China's returns from its large manufacturing sector.
  • China is also experiencing a housing slump: housing prices in China declined in February in 45 of 70 cities surveyed by the National Bureau of Statistics.
  • Finally, as China's economic growth has slowed (from a reported 9.2 percent annual rate at the end of last year to approximately 7 percent during the first quarter of this year), its exports have also dropped off.

Chinese leadership should accept these challenges and deal with them in a responsible way that will not harm global economic recovery.  To this end, three broad policy options will demonstrate China's maturity both domestically and abroad.

  • First, allowing greater exchange rate flexibility would demonstrate a readiness to adapt to an economy that does not grow as fast as it has these past few years. As China's economic growth slows, it will need to be able to harness monetary policy in order to control inflation and import/export levels.
  • Second, China should shore up its financial sector, including extending more loans to the developed and developing world. Working in China's renminbi currency would give the money an internationalized role that would help make China a major player in the financial sector.
  • Third, China should be willing to take a small hit to its budgetary health by financing further stimulus to its economy. With American growth remaining stagnant and Europe facing austerity, China could become a leader in the global recovery if it were willing to artificially stimulate its home markets.

Source: John H. Makin, "Is China Slowing Down?" American Enterprise Institute, April 10, 2012.

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