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China’s Missing Business Cycle

Oct 24 , 2014

News that China’s GDP grew at 7.3% in the third quarter, its slowest rate since early 2009, is stirring renewed fears about the health of the world’s second-largest economy. As euro-zone economies flail and the U.S. recovery underwhelms, most analysts don’t want to think about China falling out of bed.

So they aren’t. The consensus view among China-watchers is that the country has undergone a shift into a slower phase of its development. Having banished the business cycle, Beijing will maintain steady growth, albeit at a slightly less blistering rate.

It’s true that the last time China’s economy slowed for a significant period was more than a decade ago. But there is good reason to suspect that the wise men of Beijing haven’t repealed the laws of economic gravity. In particular, the costs of state-directed growth are emerging in the form of an enormous debt overhang from the post-2008 credit binge.

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