China: GDP slows to a more sustainable economic model

Is a slight flutter in the Chinese GDP—a 0.2% diminution—sufficient to cause a squall in the real and financial economies?  Can explaining a financial table determine chaos?  If this is possible in general and in a globalized economy, it is very less so in China’s case.  The latest data reports indicate a 7.5% second trimester growth with respect to the same time period last year.  Perhaps the predicted 7.5% annual growth will not be realized.  The alarm has sounded in offices across industrialized nations, in universities, and newsrooms.  But is Beijing equally worried?  According to China—and probably the most farsighted observers—events that evoke concepts like “slow-down,” “hard landing,” and “contagion” are currently regarded as “”economic maturity,” “stability,” and “growth symmetry.”  In reality, discarding two tenths of a percentage point doesn’t influence the value of China’s performance; its distinction from stagnant nations is the tenacity of extraordinary success.  It is much more important to examine the reasons behind this deceleration.  Only an analysis that considers national accounting minutiae can provide insight into the country’s future.  For the first time in recent history, China’s future is engrained with contradictions whose solution cannot be substituted with simple GDP growth.  Perhaps China has, paradoxically, grown too much, or it’s towering in an unbalance manner, pushing its own model in directions that are subsequently difficult to correct.  The government, therefore, may have hoped for the economic arrest to establish itself and to remove power from those who benefit from the economic disequilibrium.  The recent credit crunch and monetary restrictions that render financing businesses and institutions more onerous can be understood in this view.  Beijing knows that injecting liquidity into the market increases the flow of money toward undesirable destinations.  The opacity of the banking system, corruption, and nepotism direct money toward construction, inflated IPOs, and mature sectors while the giant SOEs don’t distribute their profits in order to retain power.  Liquidity is not lacking, it’s only poorly allocated and channeled in directions without considering the country’s collective good.  This is why the government—anticipating radical reforms next autumn—is not worried by the slowing GDP.  It knows that hidden, consolidated and allied interests impede innovation; lobbies are difficult to combat.  The Shanghai free trade zone is emblematic of this problem.  Chinese Prime Minister, Li Keqiang, wants to transform an area of Shanghai into a distribution and production hub.  He intends to guarantee China’s evolution: no longer as a magnet for low-cost investments, but a global center and key link in the value chain.  Announced at the beginning of July, his plan requires elements that are unimaginable for the rest of the country:  free internal circulation of goods and capital, complete convertibility of major currencies, interest tax rates that are free to fluctuate with the markets, and special authorizations for foreign banks and raw material storage.  It’s an experiment that could soon reveal its viability in the rest of the country.  Strong voices in opposition to the project have been raised with unexpected candor.  Crystallized interests, threatened by a simple economic experiment, have allied themselves against the project.  The media have reported inevitable tensions that reached the point of questioning the prime minister’s authority.  The last example—and the most volatile to date—deals with Keqiang’s more or less timid determination to proceed toward reform.  It will be a long war over financial standings with alternating victories and concessions.   An entire system will be called into question, and along with it the spectacular results of reform and opening over the past 35 years.  Faced with the gigantic impact the new direction will produce, a 0.2% GDP reduction becomes a note for the history books, maybe even forgettable, or actually a welcome sign.