Article is available at: http://www.dallasfed.org/assets/documents/research/eclett/2012/el1208.pdf
Although China’s economic growth has slowed sharply in recent months, evidence suggests that the situation may be worse than reported. Several factors contributed to China’s slowdown. Demand for China’s exports in Europe and the U.S. has weakened amid the deepening European sovereign debt crisis and sluggish U.S. economic activity.
Additionally, China’s policy response following the global financial crisis is having unintended effects on its economy. China loosened monetary policy and undertook a massive fiscal stimulus program in response to 2008–09 developments. These policies, which cushioned the economy from the impact of falling demand for exports, had the unintended consequence of generating higher inflation and rising asset prices, particularly in the real estate sector. These developments forced China to reverse course and institute tighter monetary policy last year, creating another round of effects on the economy that continue this year.
China’s abrupt policy changes during the past two years are not historically unusual and have been criticized as a source of the country’s big economic swings, which hurt long-run growth. Future policymakers will need more, high-quality quantitative (as opposed to qualitative) economic research to avoid overshooting policy targets and to better stabilize the economy.
A critical first step is acquiring high-quality economic data, a process already in the works. China’s National Bureau of Statistics started a new data-collecting system under which businesses report industrial production data online directly to the national statistics agency in Beijing, reducing the chance of manipulation by local authorities. As the world’s second-largest economy, China plays an increasingly important role in the global economy. Acquiring accurate economic data is not only useful to China’s policymaking, but also helpful to other nations, allowing them to better understand China’s current economic conditions and design their policies accordingly.