Deeper analyses and real-world probabilities always suggested that such fears were overblown, but they have persisted nonetheless. Now recent data emerging from Beijing offers still more reason for investors to set aside their worst fears about China. Its economy, of course, will not recapture the astronomical growth rates of some years ago. But still, it looks quite capable of sustaining real growth in the range of 7.5% to 8.5% a year. Considering that this rate of expansion is more than four times the pace expected for the United States, it should provide considerable opportunity in Chinese investments, both directly and through equity purchases.
The slowdown in China, which has so frightened investors, has four roots—three temporary, one more fundamental and none especially unmanageable. The first is the recession in Europe and subpar growth in the United States, both of which have slowed China's export machine, a major element in its overall growth profile. Second is the legacy of 2011's monetary restraint. Although reversed in 2012, effects of that restraint have lingered, as they always do. Third, the bursting of China's real estate bubble has constrained home building, previously a mainstay of Chinese economic growth. Fourth and more fundamental, China has made an explicit decision to use domestic development more in its growth strategy, probably a good move for the longer term but a cause of slower growth initially.
The less than stellar economic performance of Europe and the United States was bound to slow China's growth. After all, exports have accounted for more than two-thirds of that economy's overall expansion and the European Union is China's largest overseas customer, while the United States is its second largest. According to Chinese government statistics, overall Chinese exports as of November rose less than 3% from year-earlier levels, well down from expansions in the high teens averaged in 2010 and 2011.
Nor is there reason to expect much of an acceleration any time soon. Even with recent progress on Europe's debt crisis, the continent will take a long time to free itself from its financial and fiscal burdens and return to robust growth. At best, it will show very modest growth in 2013, and even that is in doubt. Nor does it look as though the United States will recapture rapid growth any time soon. But if there is no reason to look for much improvement on this front, there is also no reason to look for matters to get much worse.
If the export picture is still dim, things are improving on the policy front. In 2011, Beijing, fearing a rise in inflation toward 8% or more, ordered the People's Bank of China to drain liquidity from the Chinese financial system. It did so several times, by raising its benchmark interest rate and the percentage of reserves it required banks to hold against their loans and deposits.
While this behavior has left a mark on the pace of growth to date, now, with inflation back down to a much more acceptable 2% to 3% annual rate, the People's Bank has begun to reverse its policy stance. It has cut its benchmark interest rate and reduced the reserves required of banks.
Although it takes time for such a policy change to have its full effect, liquidity has already improved. According to People's Bank statistics, the broad M2 measure of money in circulation has risen a strong 14.1% above year-ago levels. Bank lending, too, has begun to recover and looks on track to reach 8.5 trillion yuan ($1.35 trillion) in 2012, some 13% over 2011 levels.
China's real estate problems also show some signs of improvement. Prices, of course, are down some 25% from their peak of a couple of years ago. Building activity has slowed accordingly. But if the sector hardly adds to growth, it would be a mistake to draw, as too many Westerners do, parallels between China's and America's real estate problems. With Chinese law insisting on 20% down on a first residence and 50% on a second, Chinese homeowners are much less leveraged than Americans were and are. China's debt lies largely with local governments, which, although hardly welcome, is a lot easier for Beijing to cope with than the widespread subprime debt was for Washington.
China can also look forward to a faster work down of excess housing inventories. Many Chinese have already begun to take advantage of now reduced mortgage rates, especially discounts of 15% for first-time homebuyers. But more fundamentally, there are 11 million marriages a year in China, and some 10 million to 12 million people a year migrate from the countryside into China's cities. Major cities already report increased transactions, and price erosion seems to have stopped. Chinese government statistics on home prices in 100 cities show an end to price erosion and even a modest rise for some months now.