No fear of a hard landing

Panic responses to fall in China's growth rate are unwarranted because economy is on right track to meet this year's target

China's GDP grew by 7.8 percent in the first half of 2012, falling below the 8 percent psychological barrier, with the second quarter rate being as low as 7.6 percent, the sixth consecutive quarterly slowdown. This has created panic in some European and American media, and caused plenty of worry in China.

On July 16, The Wall Street Journal said China would drag the world economy into "another recession". On the same day, a commentary in Germany's Die Frankfurter Zeitung titled "The fear of China crash" even warned that China is facing a catastrophic economic crash.

Some people in China, too, are worried about the continuous slowdown and a possible hard landing, and have appealed to the government to take necessary actions to sustain the 8-percent growth rate for the whole of 2012. However, these reports do not reflect the current state of the Chinese economy.

China has set this year's growth target at 7.5 percent. So, even if the economy continues to grow at 7.6 percent in the second half, the entire year's average will be 7.7 percent. China's 12th Five-Year Plan (2011-15) envisages an annual growth rate of 7 percent. Hence, if 2012 has a growth rate of 7.7 percent, the economy needs to grow only by 6.4 percent a year from 2013 to 2015.

An 8-percent growth rate was the "red line" for China during the 1997-99 Asian financial crisis and the 2009 global financial crisis. But that's no longer the case because China is shifting its focus from rapid economic growth to a more sustainable development model.

By examining the three driving forces of the Chinese economy for the second half of this year, one can better understand the economic slowdown.

First is the decline in fixed investment, which grew only by 20.4 percent year-on-year, that is, 5.2 percentage points lower than in the first half of 2011. The main contributing factors to this slower growth were declining real estate investment and decreased railroad construction. The former is the result of strict controls aimed at deflating bubbles and the latter a necessary adjustment after exceptionally high growth in previous years.

However, fixed investment in other industrial sectors grew by 23.8 percent. Total fixed investment was 15.07 trillion yuan ($2.36 trillion), or two thirds of the GDP, still the world's highest. These two changes, combined with impressive industrial fixed investment, are actually healthy signs for the Chinese economy.

The second economic driver is domestic consumption. Recent figures show the total retail volume was up 14.4 percent year-on-year. With a much lower consumer price index, the real growth rate hit 11.2 percent, 3.4 percentage points higher than the GDP growth. Another indicator of domestic consumption, auto sales, was up 9.1 percent, too. This means consumption is growing fast, a good sign as Beijing tries to rebalance the economy away from export-driven growth toward higher domestic consumption.

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