Lardy, Lagarde Say Worries About China Overdone

Nick Lardy, China specialist at Washington's Peterson Institute for International Economics, says the rebalancing underway in the world's second largest economy is a good thing. Speaking October 1, Lardy said China's shift away from reliance on manufactured exports to domestic consumption "may be the beginning of a virtuous cycle."


China's service sector is growing rapidly and now accounts for 50% of gdp. Lardy is not concerned about the slowdown in overall growth, a trend underway since 2010. Gdp growth this year is expected to be somewhat slower than the 7.3% expansion of 2014, an expansion that created 13 million new jobs. Five years ago China's economy expanded by 12%.

The growth of domestic consumption, said Lardy, helps explain why the World Bank has reclassified China as upper middle-income country. The overall deceleration of the economy, said Lardy, is the result of a sharp slowdown of investment in housing, which he regards as positive. During China's housing boom property investment was growing at a 30% pace compared to the current 3.5% that Lardy regards as sustainable.

Lardy does not regard the Chinese stock market correction as particularly significant. Lardy is optimistic about China and said only a big expansion of credit or increased investment in housing would give him pause.

International Monetary Fund managing director Christine Lagarde on September 30th said the slowdown in China is negatively impacting global growth. But in a Washington address in advance of the IMF's annual meeting, Lagarde said the rebalancing in China is a good thing.

"China," she said, "is in the midst of a fundamental and welcome transformation," intended to further boost living standards. These "deep structural reforms" will by design result in a somewhat lower growth rate. Lagarde said Chinese policy makers are facing a "delicate balancing act:..needing to implement difficult reforms while preserving demand and financial stability."

Jim O'Neill, the former Goldman Sachs executive who is now a minister in the British Treasury, said last month in Beijing that China is essentially doing what western advisors have recommended for years; shifting from a reliance on manufactured exports to domestic consumption. O'Neill said despite the sharp recent decline in Chinese equity prices the Shanghai stock market is still up compared to the same time a year ago.