Tellingly, conventional Western analysis has been slow to draw the connection between recovering inflation and weakening growth - or more specifically, how the former is both a direct consequence of and a cushion to the latter. Even where it does, like here, it tends to overlook the positive sign even as it acknowledges that the slowdown has been deliberate:
A lot of China watchers knew this would happen eventually. In April, Chinese state media quoted an "authoritative figure" who warned that the government would not use unfettered credit growth to try to inflate the economy out of a slowdown. The economic reforms that China has been promising for years now, they assured readers, are still coming.Rather than applaud tentative initial evidence that some supply-side shift is finally underway, the bearish focus is now on the declining growth: it's as if the sky's falling that fixed-asset investment is growing at just 8.1 percent instead of 8.8 percent, while consumer spending is up barely 10.2 percent instead of the projected 10.5 percent. These are quite stellar figures, to be sure, but what's more significant given China's specific set of problems is that unexpected dips in investment growth shouldn't be taken so negatively anymore, anyway: with private investment still in the doldrums (if even showing tentative signs of bottoming), one can just as easily spin the more consequential decline in public investment as an indication that local governments aren't simply building more roads and bridges to nowhere.
Of course, it may well be that growth is heading lower than the official minimum target of 6.5 percent in the second half, and this would present Beijing with a difficult decision: either it unleash another flood of cheap credit or it must manage drastically reduced (by its standards) growth expectations. The latter choice would be far more palatable to both domestic and international investors should it be accompanied by more evidence of supply-side restructuring, including especially the further recovery of factory-gate industrial prices. A stable yuan and balance of payments would also be big mitigators: the country will gain credibility as it resists devaluation pressure to firmly put to rest the notion that it can export its way to better growth, whilst a continued favorable balance of trade will serve as an indication that it's moving up the global value chain as befits a middle-income nation aspiring to join the ranks of the rich.
More to the point from a practical perspective, slower growth in the low-6's would send a signal that the threat of mass unemployment and social unrest is small, i.e. that there's enough new jobs to be done in the services sector to absorb (if even with lower pay and benefits) the millions of redundant industrial workers until such time as the overall economy is more robust and healthily mixed between primary, secondary, and tertiary sectors. This would boost domestic and international confidence alike in China's stability and resilience as a medium to long-term investment, thereby fueling another virtuous cycle of global intercourse and integration for it.
Optimistically, Xi Jinping is both willing and politically strong enough to sacrifice some GDP for some supply-side reform driven by industrial downsizing and restructuring; more realistically, he'll proceed cautiously and incrementally, in keeping faithful to the priority of verifying the integrity of each stone in the river crossing with extra care before committing to transfer one's full weight onto it. However things go from here on out, Beijing faces a fundamental tradeoff of quantity versus quality of growth which can only become harder to avoid.
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