China’s growing problem

July 15, 2013

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Chinese growth slipped to 7.5% in the second quarter — making it now 9 out of the last 10 quarters that the growth of the world’s second-largest economy slowed. Although 7.5% wasn’t quite as low as was expected, it’s low enough that analysts at both Goldman Sachs and JP Morgan are predicting 7.4% annual growth for 2013, which would be the lowest the country has seen since 1990.

Tim Orlik points out that one worry when it comes to China is its reliance on exports. “The government wants consumption to play a bigger part in driving growth, taking over from overdone investment and exhausted exports. But so far in 2013, the reverse is happening”, he writes. Dexter Roberts reports that household consumption in China is only 35.7% of GDP (it’s over 70% in the US), as many people in China feel that they have to save up to avert financial disaster because of poor public benefit and pension systems.

China has posted some of the strongest GDP growth in the world over the last two decades, but that hasn’t translated into profits for foreign investors (even as the American government pushes China to further liberalize its markets). “Foreigners earned less than 1 percent a year investing in Chinese stocks, a sixth of what they would have made owning U.S. Treasury bills” in the last 20 years, Bloomberg reports. Meanwhile, tech and energy giants with big exposure in the Chinese economy — Advanced Micro Devices, Altera and Intel, to name a few — have also been hit in recent quarters, writes David Gaffen.

China has recently flirted with a credit crunch, may be facing a real estate bubble, and, as Gwynn Guilford writes, “businesses and local governments are increasingly taking out new loans to pay off old ones”. Over the weekend, Chinese state media reported that one government advisor warned “arguments about whether China will grow at 7% or 7.5% are ‘pointless’ because the economy is already in a financial crisis which may only worsen if the government doesn’t address the country’s crippling debt problem”.

William Pesek has consistently argued against obsessing over Chinese GDP data. A month ago, he wrote that slowing GDP growth is actually a good thing for China, because “a humming export engine deadened the urgency for change” in Chinese politics, and necessary, successful economic reforms have come in China only after periods of crisis. Today, he argues that the best thing to do with the growth data is to ignore it: “Obsessing about every little 0.2 percentage point GDP difference in output distracts us from the real problem: a Chinese hard landing that may impossible to see until it’s too late”. – Shane Ferro

On to today’s links:

Long Reads
The cartel of doctors that control Medicare – Washington Monthly

Alpha
The strange, amazing story of the downfall of the hedge fund king of Akron, Ohio – Roddy Boyd

Big Brother Inc.
Stores are now tracking your cell phone to learn about your buying habits – NYT

Cephalopods
Ex-Goldman trader Fabrice Tourre was called “Breezy” during his time volunteering in Rwanda – DealBook
Forget Fab, go after Cayne and O’Neal – William Cohen
How the Fabulous Fab trial could test the SEC – Reuters

Ugh
McDonalds tries to prove you can live on low wages, proves the opposite – Think Progress

Surprising
Why there are so many female entrepreneurs in the Middle East – Economist

The Fed
The Fed helped fund the DC metro system – Neil Irwin
“It is a dangerous thing for the Fed to be a one-man show, dominated by a single, dazzling intellect” – Matt Phillips

Regulations
Why has it taken so long to reform ratings agencies? – Mike Konczal
“You could think of the 21st Century Glass-Steagall Act as a measure to unwind the structure that Citigroup would become” – Simon Johnson

New Normal
In 2013, US employers have added far more part-time positions than full-time jobs (a reverse of 2012) - WSJ

Awesome
What it took 20 years on Wall Street to learn – Chris Arnade

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