China’s gross domestic product growth was strong in the first half of the year, growing at a real rate of 9.5%, according to the National Bureau of Statistics of China.However, nominal GDP data gives a more accurate representation of the large cyclical swings being experienced by the Chinese economy, according to Lombard Street Research. Diana Choyleva, a director of the consultancy, recently noted that on a quarterly annualised basis, nominal output growth fell from 13.6% in the first quarter of the year to 10.7% in the second quarter. This figure is down from the peak of 19% in the third quarter of 2004. The slowdown was caused by a decrease in domestic demand growth, says Choyleva. Quarterly annualised domestic demand growth climbed 8.6% on average between the third quarter of 2004 and last quarter, a significant decrease on the average growth of 18.9% for the four previous quarters, she notes. Export growth also fell last quarter, down from an average quarterly growth rate of 8.6% since the beginning of 2002 to 3.3%. Exports may continue to support economic growth this year, she says, but adds that “overinvestment and wafer-thin profit margins are likely to exacerbate the cyclically and policy-induced slowdown of domestic demand”. Choyleva argues that a hard landing is developing in China, with the final impact coming in 2006 if the American economy also experiences a hard landing. Philip Ehrmann, head of the Pacific and emerging markets team at Gartmore, says that high commodity prices have caused profit margins to come under pressure. He adds, however, that over the medium and long term, the outlook for the Chinese economy looks fairly positive. “I don’t think we are talking about a hard landing. By looking at the GDP numbers and talking to the companies, it looks like we are heading towards a slowdown,” he says. Ehrmann adds that a slowdown is not bad news, as China is capable of living with a growth rate of 7-8% for years to come.* Diana Choyleva “The illusory Chinese growth acceleration”, Lombard Street Research World Service Daily Note, July 20, 2005.