Chinese economy losing some of its sizzle

Exports, which have driven the economy for the past 30 years, grew by a mere 4.9 pc last month

As China’s leaders have been preoccupied with a political struggle leading up to a once-in-a-decade leadership change this autumn, there are increasing signs that the Chinese economy may be running into trouble.

Recently, China announced that growth in imports had unexpectedly come to a screeching halt in April, rising just 0.3 per cent from the same period a year earlier, compared with expectations for an 11 per cent increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore to computer chips.

China has been the largest single contributor to global economic growth in recent years, and a sustained slowdown in its economy could pose problems for many other countries. Particularly exposed are countries that export commodities like iron ore and oil and rely on demand from China’s steel mills and ever-growing ranks of car owners.

Exports, a cornerstone of China’s economic growth over the past three decades, grew 4.9 per cent last month, half as much as economists had expected.

And a slump in new orders over the past month at the Canton Fair, China’s main marketplace for exporters and foreign buyers, suggests that overseas shipments by the world’s second-biggest economy, after that of the United States, may not recover quickly.

Growth in other sectors appears to be slowing, too, particularly in real estate. Data showed that residential land sales in the country’s 20 largest cities had fallen 92 per cent last week from the week before, as declining prices for apartments have left developers short of cash and reluctant to start further projects.

Bankers and senior executives from provinces all over China, cited a broad deterioration in business conditions. Two of them said that some tax agencies in smaller cities had been telling companies to inflate their sales and profits to make local economic growth look less weak than it really was, while reassuring the companies that their actual tax bills would be left unchanged.

There are early signs of a credit squeeze, at least among private sector companies. Many seem to be asking their suppliers for more time to pay debts and complaining of cash flow problems. “The business environment is getting tougher and tougher,” said Tom Zhang, the sales manager at the Hebei Haihao High Pressure Flange and Pipe Fitting Group.
“Competition is very intense to get more business. Our domestic sales are down from last year, though our export sales are more or less stable,” he said.

Some sectors are faring better. Car sales rose 12.5 per cent in April from a year earlier, according to the Chinese Association of Automobile Manufacturers. The country’s National Bureau of Statistics have said that inflation in consumer prices slowed to 3.4 per cent in April from 3.6 per cent in March. The fading of inflation pressures makes it easier for the government to stimulate the economy without pushing up prices.

China has noticeably not loosened monetary policy in recent months to mitigate the economic slowdown. The government had been moving toward easing through the winter, lowering cash reserve requirements for banks in November and most recently in February, so that the banks could lend more.

But the government has left the reserve ratio unchanged since then. It has also left regulated interest rates unchanged at the fairly high levels set last July, when the economy was much stronger. Changes in the reserve ratio or interest rates are ultimately decided not by the central bank in China but by the country’s political leadership.

The government’s inactivity has coincided with the biggest political drama in China in more than a decade: the ouster of Bo Xilai, a leading advocate of renewed government control over the economy and public life. “We have a lot of room to adjust the reserve ratio,” Zhou said at the time.

“On the other hand, it is necessary to see whether there is a necessity to adjust.” Stock market investors appeared to be betting that Chinese leaders would be forced to ease policy in response to the latest trade figures. After early gains, the Shanghai and Shenzhen stock markets dropped sharply in late morning when the export and import statistics were released. But both markets later rebounded, and they closed the day little changed.

GaveKal Dragonomics, a research firm specialising in the Chinese economy, said in a report that it was “still true the Chinese leadership’s obsession with growth and stability is heightened during transition years. This makes it implausible that the leadership would allow the economy to collapse while they fight over who gets what job”.

The sectors doing best in China these days seem to be connected to state-owned enterprises and local governments, which continue to enjoy preferential access to loans from the state-controlled banking system. Projects like rail construction and low-income housing continue to move ahead.

But Chinese officials have long tracked prices of industrial commodities and activities like electricity consumption for signs of the economy’s health, said Andy Xie, an independent economist based in Shanghai. Growth in electricity consumption has been slowing.