Much of the blame for the global stock market sell-off that began last week and carried over into Monday has been placed on China. A substantial slowdown in its industrial sector and clumsy management of the country’s stock market and currency have given investors pause and critics ammunition. On Monday morning, leading Republican presidential contender Donald Trump took to social media to predict that China could drive the U.S. into a depression.
However, things might not actually be as bad as they seem in China, according to David Dollar, a senior fellow in the Brookings Institution’s John L. Thornton China Center.
There is no question that the industrial sector of the Chinese economy is suffering, Dollar said, which the economic data for the first half of the year made pretty obvious.
“If you look at the first half data what you saw in the first half was a weak industrial sector, but growth in service and consumption,” he said. In fact, most of the job growth in the first half of the year was centered not in industry, but in the service sector. Analysts looking at the immediate state of the economy though, have limited data, most of which is focused on the performance of the industrial sector.
“That’s painting a fairly glum picture because industry is really weak in China,” said Dollar, who served as the U.S. Treasury Department’s economic and financial representative to China from 2009 to 2013, and formerly served as the World Bank’s country director for China and Mongolia. “Industry’s in trouble, but that’s just one part of the economy,” Dollar said.
“What we don’t know is whether services are holding up well and whether household income and consumption are up.”
This is extremely important, because China’s economy is in the midst of a critical transition from one based almost completely on industrial production to one in which the service sector, with its better-educated workforce and higher salaries, plays a much more important role.
Part of the trouble in trying to assess the health of the Chinese economy, he said, is the lack of reliable data on the service sector.
In the U.S., the Federal Open Market Committee at the Federal Reserve processes reams of regularly-produced survey data about the state of all sectors of the economy, including household data that provides detailed information about employment, income and spending. There doesn’t appear to be anything comparable available to Chinese policymakers at this point, he said.
That means that the best information available to assess the true state of the Chinese economy is available only quarterly.
What’s more, Dollar said, the Chinese government isn’t taking the sort of actions that many economists would expect it to if it were seriously concerned about an economy-wide slowdown.
There are multiple options available to the Chinese government for injecting financial stimulus, Dollar said, all of which the government could easily afford from a fiscal perspective.
“They actually have a very conservative fiscal policy,” he said. He added that measures such as a temporary lowering of the country’s high Value Added Tax could prompt a surge of spending, as could investment of state funds in new education and healthcare initiatives. (Unlike the U.S., where infrastructure spending is one of the go-to areas for economic stimulus, there are many economists who believe that China has, for now at least, overbuilt its infrastructure and should focus spending elsewhere.)
And while the country’s stock market has been hit hard in recent weeks, that doesn’t mean the same thing in China as it would in the U.S.
“Stock market capitalization is about 60 percent of GDP in China,” said Dollar. “That’s less than half the level of the U.S. and other economies. The market is not a major source of funding for companies or a place for families to put their wealth.”
Dollar said that he thinks it is “legitimate” for people to be nervous about the state of the Chinese economy, and to wish that the Chinese government was better at communicating its evaluation of the economy and its future plans.
The bottom line, Dollar said, is that there isn’t enough information to make a reliable estimate of the condition of China’s economy. However, he added, “Once we get all the information in, I think the picture is brighter than people realize,” Dollar said.