Is China's Growth Really Slowing? Not Really

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by: The Specialist

Summary

China is expected to grow “only” 7.1% or 7.0% next year.

This amount, if achieved, would actually still be record growth output.

The headlines claiming slowest growth in five years are missing the bigger picture.

Five years ago the higher percentage was off of a much more tiny base. The growth forecasts in actual GDP output dwarfs that from five years ago.

I'd like to see higher and higher growth percentages out of China just as much as anybody. The belief is that the stronger China's economy is the more its people will inevitably consume and buy products outside of its borders, aiding the world economy including within our domestic borders. Headlines such as this one -- China growth could slow to 7.1% in 2015 -- scare me too, as I hate the word "slow" when it comes to any economic hopes. But is it really "slowing" or has China simply gotten so big, kind of like Google or Apple, that runaway percentage growth just simply isn't realistic?

Let's address two bullet points. First you have this:

"China's economy may slow to 7.1% in 2015 from an expected 7.4% this year as a sagging property sector weighs on the world's second-largest economy, researchers from the nation's central bank said."

Yes, 7.1% is a number that is less than 7.4%. The first thing bulls will point out is 7.1% is still rather rapid growth, but the bears will retort it's a declining trend. But is it necessarily? Believe it or not, if you do the math, 7.1% is a faster raw number growth than when it comes on top of 7.4% the previous year. It's the whole compounding interest thing at work. For example, if gas prices were $4.00 per gallon and increased 7.4% it would add $0.296 per gallon. If they increased another 7.1% from there it would add $0.305 per gallon, a higher raw number, despite the "slower" percentage gain. Would you feel like gas price inflation is getting slower when it goes up more per gallon than previously? Most people wouldn't. The raw number increase in this example is the same principle with China's GDP. If China made an extra 1.00 billion widgets this year, it is expected to make those same extra 1.00 billion widgets from this year and another extra 1.03 billion widgets next year. It's not "slowing." Total marginal output is actually expected to be 3% higher next year than the marginal output this year.

The second bullet point I'd like to address is this:

"China's economic growth came in at 7.3% in Q3, the slowest pace in five years. Economists have recommended that China lower its growth target to around 7% in 2015."

Yes, it's true that 7.4% or even 7.0% next year would be the "slowest" pace in five years based on a percentage. However, also again, it was would be the highest raw number of growth in China's history. Just five years ago, China's economy was roughly half the size of what it is expected to grow to in 2015. To put in perspective, the amount of economic growth as measured by GDP expected in 2015 would be equal to something over 18% if the same growth occurred in 2009.

In short, the average income of the average worker in China is expected to improve next year by the largest clip in its history. Percentages can be misleading. I'm sure when the caveman discovered fire or the wheel, his GDP went up around 10,000% that year. Does that mean our progress is slowing down and the good times were back in the day of the caveman and his 10,000% GDP growth? Of course not. It's easier to grow more rapidly from a small base, but it isn't necessarily as meaningful.

My point is this: I think the panic over China's "slowing" is unwarranted at least for next year as China's real growth in real output is expected to be more robust than ever before. Don't fear China's growth next year: Get excited for it.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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