24/7 Wall St.

Even the most sophisticated economist could only guess about the global effect of a 7.5% GDP growth rate in the Chinese economy this year. Some analysts claim this will be the slowest growth rate since 2004. Others say the rate is below where it has been for decades. Either way, slower is slower, both for the People’s Republic and for the rest of the world.

Almost any well-educated American can tell that a moderation of China’s GDP expansion is based to some extent on the slow growth of the worldwide economy, particularly in Europe. China cannot export what it cannot sell, at least not for any extended period. Even if inventories among its trade partners are low, it would take only quarter or two to restock them. GDP growth throughout much of the European Union will be negative then. Japan’s economy has slowed considerable. At a 3% GDP growth rate, the U.S. cannot by itself support the Chinese manufacturing machine.

China says it will turn to internal consumer spending to fuel manufacturing. There is contradiction in that. China’s middle class was created by its factory sector. A slowdown in that sector eventually will cause a slowdown in consumer spending. Workers have fought for, and in many cases gotten, higher wages. That will not continue if demand slackens. Some Chinese factory workers may even be out of work this year and next.

China may make it easier for consumers to get credit at low interest rates. This alone will not reverse a drop in consumer spending. An increase in Chinese unemployment will take a number of people out of the consumer markets, no matter how “easy” credit is to obtain.

The improvement of China’s internal demand as a way to offset a drop in exports only works if the People’s Republic can somehow keep people employed, even if they are not needed in the private sector.

Douglas A. McIntyre