China's Great Miss?

It's official: China grew 7.4% last year-its slowest growth rate in 24 years. Growth missed the official target and could drag down the global economy. And it's only going to get worse. At least, that's how headlines portrayed China's latest slowdown. As ever, some perspective is in order. Despite the handwringing, slower growth isn't a global expansion-killer or bull-market-ending nasty shock-a slower-growing China still contributes a ton to global GDP.

The way headlines tell it, you'd think 7.4% growth was a giant disappointment for China's growth-obsessed government. Yet GDP didn't really miss the target. Officially, the target was "about 7.5%." "About" is a nebulous word, and most headlines skipped it and went straight for the 7.5%. Yet officials were always clear the target was a range. Days after Premier Li Keqiang announced the target last March, he and China's Finance Minister said 7.3% or even 7.2% annual growth would qualify. So 7.4% isn't a surprise or a miss-it's in the target range. And just 0.3 percentage point slower than 2013. Status quo, folks.

Slower growth is also somewhat intentional. Officials didn't set a lower target simply to keep expectations down. They realize slower growth is a byproduct of their ongoing shift from export-led growth to domestic consumption-their effort to keep China advancing long-term and curb recent excess. Last decade's eye-popping growth was the fruit of a government-engineered, export and factory-led boom. It worked great when wages and Chinese manufacturing costs were low. But it couldn't last forever. Wages and shipping costs rose. Labor became scarce, thanks to the one-child rule. Factories overshot to meet lofty local growth targets, creating oversupply in several industries. Polluted skies and rivers made the locals antsy. Citizens craved better working conditions and higher income potential-service-sector jobs. So, officials decided to overhaul their model, promoting services and deliberately dialing back manufacturing. They want high-quality growth, not just fast growth for fast's sake. The slowdown is a tradeoff.

Plus, recent boom years were largely credit-driven, led by surging shadow banking activity-which officials are now cracking down on. Local governments couldn't issue municipal bonds, so banks arranged complex financing deals in the shadow banking system to get them cash. Some governments are now having trouble repaying, and the central government wants to rein them in. They're also keeping traditional loan quotas low, which limits financing for smaller firms. Both have created a drag-not surprising. (And not really a negative for China, as cleaner credit markets improve the financial backdrop.)

For global investors, what matters is this: China growing 7.4% isn't a drag on the world or a bull-market killer. Usually, it takes a negative shock worth a couple trillion to truncate a bull market. China growing 7.4% doesn't shave $2 trillion off global GDP. It adds! And while China is growing at a slower rate, its contribution to world growth, in dollars, is bigger than when it grew double-digits because it is growing off a higher base. In 2006, China grew double digits, adding $480 billion to nominal world GDP growth.^[i] Last year, China added $863 billion.^[ii] That's like adding an entire Indonesia or Netherlands.^[iii] Or a Saudi Arabia and a Morocco.^[iv] This also boosts developed-world firms selling into China. That's a huge demand bump for them! China's "slower" growth can still be a big revenue growth driver. The strong demand increase is a happy factoid few consider-bullish.

The world economy isn't risk-free, but a wee slowdown in China's growth isn't really a threat-headlines otherwise are just a repeat of longstanding Chinese hard landing fears, bricks in that Great Wall of worry.