China started 2016 with mini stock crashes and a currency devaluation.
Ever since, people have been extra-worried about the slowdown of the Chinese economy.
Or, more accurately, people have been worried about what slower Chinese growth would mean for the rest of the global economy.
However, Capital Economics’ Julian Jessop argues that much of the recent panic over China looks “increasingly over done.”
In a recent note to clients, he outlined three key points that fear-mongers have glossed over:
- No one really thought that China could maintain double-digit growth forever — especially as incomes started catching up with the West. “Some slowdown was both inevitable as the economy matured, and desirable as part of rebalancing away from over-investment towards consumption,” wrote Jessop.
- China’s growth has actually been slowing down for some time now. Growth in China peaked in 2007, and has been on a downward trend since 2011. “Crucially, this has not prevented advanced economies from picking up, or global growth from stabilizing,” adds Jessop.
- The larger size of China’s economy means that even slower growth can mean big increases in demand and global growth. “Indeed, on the official data at least, the increase in China’s GDP in 2015 was practically the same as in 2007, even though the annual growth rate had more than halved,” points out Jessop.
To illustrate the second two points together, Jessop also included a chart showing the GDP growth year-over-year (the black line) and the change in GDP (the purple bars). As mentioned above, growth peaked in 2007, and has been slowing down.
However, the actual increase to China’s GDP every year from 2010 to 2015 (except 2012) has been roughly equal to that of 2007.
Now, there are still some serious worries about China in the medium term, including the high and rising levels of debt and the damage to credibility caused by interference with the stock market, he concedes.
“But despite some genuine risks, China’s economy is not collapsing,” argues Jessop.
“Nor is there much to justify fears that the turmoil in China’s equity or currency markets will cause major problems in the rest of the world.”