China's economic juggernaut has been hobbled by Europe's recession and America's sluggish recovery. Export orders declined at the fastest pace in 42 months in September, manufacturing contracted for an 11th straight month and China's purchasing managers' index (PMI) fell to its lowest level in nearly two years.
Combined with the long-term underperformance of the Shanghai Composite, such lackluster data is giving rise to concern about a "hard landing" in China. Longtime China bears such as hedge fund manager Jim Chanos and Forbes' columnist Gordon Chang have become more vocal lately — or at least have been given more of a hearing.
On Monday, the World Bank cut its outlook for East Asia, saying the China slowdown could intensify and last longer than currently anticipated. The World Bank cuts its outlook for Chinese growth to 7.7% in 2012 and 8.1% in 2013, down from 8.2% and 8.6%, respectively. A recent Reuters poll forecast China's annual growth would ease to 7.4% in the third quarter, putting it on track for sub-8% growth for the first time in more than a decade.
Still, over 7% GDP is nothing to sneeze at and Richard D'Aveni, professor of strategic management at Dartmouth's Tuck School of Business says reports of China's imminent demise have been exaggerated.
Having just returned from China, D'Aveni believes the recent slowdown is a short-term concern and that China's long-term prospects remain bright.
"Everybody's apoplectic about slowing growth but they're still growing five times faster than the U.S.," he says. "No matter what happens, they are still sitting on trillions of dollars reserves and the country has little debt."
Beyond that, D'Aveni is impressed with China's ability to manage the transition from an export-led economy to one driven by domestic demand. China's market is the world's largest and rising incomes will continue to generate demand for goods and services; retail sales are up 14% this year in China, down from previous years but still robust. (Golden Week retail sales were 15% this year vs. 17.5% a year ago, Reuters reports.)
Furthermore, he notes the ability of central bankers to successfully manage and direct the economy.
As part of efforts to support the economy, China's central bank cut interest rates twice this summer and has lowered the level of cash it requires banks to hold as reserves three times since late 2011. In late September, the People's Bank of China injected a record $57.9 billion into money markets, which helped spur a big rally in local stocks ahead of last week's Golden Week celebration.
"The Chinese government has many more tools to manage a bubble than we do in the U.S. or than Japan had when their bubble burst," D'Aveni says. "They have so much control over the economy they can make it work. You can't count them out. They will stimulate their economy out of this situation."
But don't confuse, D'Aveni's optimism about China with admiration for its state-sponsored model. His new book, Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War, he writes about the threat posed by China and offers recommendations for how the U.S. and other Western powers can address the challenge, as detailed in part two of the accompanying interview.
Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him firstname.lastname@example.org
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