As the U.S. endures an artificial debt crisis, China just weathered a real one (and came out even richer)

October 8, 2013

An investor at a stock exchange in Hangzhou, China. (ChinaFotoPress / Getty Images)

Just as the United States appears ready to allow pure politics to inflict some real damage on its economy, first with a government shutdown and now possibly with a debt default, China appears to have pulled off a remarkable success with its own economy.

A few short months after enduring an economic mini-crisis that China-watchers worried could turn into a very big crisis, the country has not only recovered – it's projected to exceed even its own ambitious growth goals.

The mini-crisis, in case you missed it, came in June. Chinese leaders actually caused it deliberately. The country's credit market was in a bubble, and Beijing was worried that the bubble could burst just as the economy was slowing. That could have set off a for-real disaster that, in a worst case, might have looked a lot like America's last financial crisis, with credit markets suddenly freezing just as everyone wakes up to the shakiness of the their own financial system.

But China basically did what the United States never had the guts to do and popped the bubble on purpose, before it grew any more dangerous. Instead of waiting for the credit crisis to happen on its own, Chinese leaders just started it themselves by having the People's Bank of China tighten up credit artificially. It was a kind of controlled mini credit freeze meant to avoid The Big One. But it was risky: Economists warned that things could spiral into exactly the sort of major crisis they wanted to avoid. And even if it worked, most warned (including me!), it would be painful, averting a disaster but still slowing the economy.

To give you a sense of where expectations were, at the start of the summer mini-crisis HSBC bank cut its projection for China's GDP growth from 8.4 percent in 2014 to 7.4 percent; many expected it to plunge lower. And that was if everything worked. China set its official goal for this year – the year with the credit crisis – even higher: 7.5 percent GDP growth. That's lower than previous growth but still a high target, especially given this summer's trouble. It seemed awfully ambitious.

But it turns out that China's controlled mini-crisis from June may have actually worked – and better than even Beijing expected. "The median forecast of nine economists surveyed by the Wall Street Journal is for a 7.7 percent on-year rise in gross domestic product, comfortably ahead of target," the Journal's Richard Silk wrote, in a post with the pointed but entirely accurate headline "China Data to Prove Doubters Wrong."

There are caveats, of course: It's possible that this summer's effort was not enough to fully extinguish the credit bubble, making this year's GDP growth artificially inflated by dangerous over-borrowing. And, even if the controlled burst worked, the Chinese economy is still slowing. That's no surprise, but Beijing has to make some very big and difficult structural changes to its economy if it is to endure the slowdown -- for example, by relying less on its exports and more on domestic consumption. The Journal says that this year's growth uptick may be related to an unexpected rise in exports to developed countries – great news for China today but not something that's sustainable in the longer run.

Yet this is another case of China exceeding expectations and defying skeptics when it comes to running the world's second-largest economy. And it's quite a striking contrast with the United States's wholly political self-imposed economic setbacks of the moment. That contrast may help explain why Beijing has been so open about criticizing Washington's self-inflicted economic pain.

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Caitlin Dewey | October 8, 2013