Two years ago it was hard to find analysts who expected average GDP growth over the rest of this decade to be less than 8%. The current consensus seems to have dropped to between 6% and 7% on average.

I don’t think Beijing disagrees. After assuring us Tuesday that China’s economy – which is growing a little slower than the 7.5% target and, is expected to slow further over the rest of the year – was nonetheless “operating within a reasonable range”, in his Tianjin speech on Wednesday Premier Li suggested again that the China’s 7.5% growth target is not a hard target, and that there may be “variations” in China’s growth relative to the target.

I think every one knows that variations will only come in one direction, and although his stated expectations are still pretty high, most analysts, correctly I think, interpreted his remarks as a warning that growth rates will drop even more. Here is how the People’s Daily described the speech:

Premier Li Keqiang on Wednesday said China can meet the major economic goals this year and policymakers will not be distracted by short-term fluctuations of individual indicators. Li downplayed the importance of some economic data from the past two months when delivering his keynote speech to the 2014 Summer Davos, which opened Wednesday in north China’s port city of Tianjin.

…China has targets of GDP growth around 7.5 percent and a consumer price index (CPI) increase of about 3.5 percent in 2014, with 10 million more urban jobs to keep the urban unemployment rate at a maximum of 4.6 percent.

Inflation is also below target. According to the National Bureau of Statistics Wednesday release, “In July, the consumer price index (CPI) went up by 2.3 percent year-on-year. Prices grew by 2.3 percent in cities and 2.1 percent in rural areas. Food prices went up by 3.6 percent, while non-food prices increased 1.6 percent. Prices of consumer goods went up by 2.2 percent and prices of services grew by 2.5 percent.”

Surprisingly, analysts continue to hail lower-than-expected CPI inflation as giving the PBoC room and encouragement to expand credit – largely I guess because this is what analysts say when US or European CPI inflation numbers are low, and although most of us haven’t thought through the differences between China and the US in the ways prices respond to monetary policy, we don’t want to seem like we don’t know what we are doing. The constraint on monetary and credit growth in China is not CPI inflation and never has been. Monetary and credit growth in China are constrained by the impact of GDP growth on balance sheets.

For me the main information coming out of CPI inflation data is that consumer demand relative to total production continues to be too weak to drive up prices, something confirmed earlier this week by the August trade numbers, which failed to suggest strong growth in domestic demand. According to Xinhua:

China’s exports in August rose 9.4 percent year-on-year to 208.5 billion U.S. dollars, with monthly trade surplus reaching an all-time high of 49.8 billion U.S. dollars, customs data showed on Monday. China’s imports continued to contract last month, with a year-on-year decrease of 2.4 percent, to 158.6 billion U.S. dollars, the General Administration of Customs said in a statement.

Trade surplus in August jumped 77.8 percent year-on-year and hit a record high again, after reaching an all-time high of 47.3 billion U.S. dollars in July, the data showed.

Although in my opinion the current 6-7% medium-term growth expectations are still far too optimistic, and will almost certainly be disappointed within one or two years, the good news is that most analysts at least recognize that the increasing risk of a “hard landing”, which they mostly seem to define as growth below 6%. The idea that during the rebalancing process Chinese growth can drop as sharply as it has for every other country that has gone through a similar rebalancing is still hard to accept, even though a little digging would make it clear that analysts underestimated the pace of slowdown during each of the previous cases too.

Still, the fact that we have been consistently surprised on the down side since 2010 has alerted most analysts to the possibility that we may continue to be surprised on the down side. A “hard landing” of growth below 6% is still considered unlikely, but no longer possible to ignore.

This worries a lot of people. A hard landing, we are told, would be devastating for the world economy because China is the world’s “growth engine”, and if it falters, growth around the world will also slow. There is also rising concern about a banking crisis within China. An economist at Oxford Economics recently told a Sydney audience that “Chinese authorities were understating the extent of bad loans on their banks’ books and faced tough choices in dealing with the potential bank failure.” In that he is certainly right, but he went on to say: “”We don’t know when there will be a China banking crisis and how it will play out but it is almost certain there will be one,”

I am not sure I agree. Insolvency doesn’t necessarily lead to crisis, as countries like Spain have made clear. It takes a collapse in liquidity to create a crisis, and if insolvent borrowers remain liquid, we are likely instead to see a long, difficult period of slow growth in which the losses are painfully ground out of the system (and always turn out to be greater than they would have been had they been recognized immediately). A banking crisis in China is always possible, and several people I respect are quite certain that there will be one, but I think that as long as Beijing implicitly or explicitly guarantees deposits, and as long as Beijing’s credibility with Chinese households is solid, and I believe it is, I think we are more likely to see many years of Japanese-style “zombie banks” than a banking crisis.

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