China’s Economy Slows, But Inflation Still a Threat
China’s economy is starting to slow, after two years of torrid growth achieved following the global downturn.
Chinese manufacturers’ backlogs of orders are gradually shrinking in many industries. Purchasing managers have become less optimistic about their businesses’ prospects. And after surging past the United States in car sales over the last two years, the Chinese auto market unexpectedly stalled last month, as carmakers curtailed production plans.
Because China’s cooling economy is partly a result of Beijing’s efforts to contain inflation, some economists are not worried, saying a slight slowdown could be positive. And they say that after the government eases off the brakes, economic growth should quickly pick back up.
But other experts worry that inflation is already so entrenched that the government may be forced to continue braking the economy for a considerable time.
“They have to continue to tighten policy into what we expect will be a sharp growth downturn, already likely to be under way,” said Diana Choyleva, an economist in the Hong Kong office of Lombard Street Research, an economic forecasting firm based in London.
The world closely monitors the temperature of China’s economy, so crucial has it become to the health of global business and finance. This spring, as economists at Western investment banks have been reducing their growth forecasts for China, the specter of slackening Chinese demand has helped send world prices for industrial commodities like copper falling by 10 percent or more.
And the “A” share stock market in Shanghai has dropped 11.7 percent from its high on April 18, including drops of 0.13 percent on Monday and nearly 1 percent on Friday.
Despite signs of slowing Chinese growth, some international corporate executives say they remain optimistic, particularly if they look beyond the next several months.
“I don’t think it’s a hard landing,” said Martin Brudermüller, the vice chairman for BASF of Germany, the world’s largest chemical company, which sells to a wide range of industries in China. “I’m not really worried at this point.”
And even though Goldman Sachs last Tuesday cut its forecast for economic growth in China during the second quarter to 8 percent — down from 8.8 percent — it predicted that growth would recover to 9.3 percent by the fourth quarter.
The optimists note that the Chinese economy expanded robustly until this spring, even though policy makers had been stomping on the brakes since October to try to curb inflation. Seen from that perspective, policy makers can easily press the growth accelerator, after inflation starts to subside.
The braking measures have included the requirement that commercial banks, to restrict their ability to lend, must park more than one-fifth of their assets at the central bank. That is starving all but the largest and most politically connected companies of capital.
And trying to slow a real estate boom that looks more and more like a dangerous bubble, the government has also put many restrictions on issuing new mortgages. The measures include requiring higher down payments, to reduce the risk that a real estate collapse would harm the banking system, as happened in the United States.
Another slowdown factor: the huge government investments in high-speed rail and other infrastructure, which played a central role in China’s swift recovery in 2009 from the global economic downturn, have begun to level off.
But Douglas Hsu, the chairman and chief executive of the Far Eastern Group, a big Taiwanese multinational with extensive investments in the cement and petrochemicals industries in mainland China, predicted that government-supported efforts to increase construction of low-income housing and move more people from rural areas to cities would offset the gradual deceleration in infrastructure spending in the months and years to come.
The big question now is how much economic growth may slow, before the authorities shift their priority from controlling inflation to revving the growth engine.
Some businesses here in Changsha, a city of 6.5 million people that is the capital of Hunan Province in south-central China, say they already see weakening sales.
“Our business is down 30 to 40 percent, we’re losing money every day,” said Li Chuanlian, the manager of a store that sells stoves.
Real estate prices are still rising briskly here, as speculators with cash continue to snap up properties after the completion of a high-speed rail line linking Changsha to the more affluent Guangzhou. But in many cases, buyers are economizing on furnishing those apartments, Mr. Li said.
Blackouts, caused by the nation’s utilities balking at high coal prices, are another headache.
“With no electricity, they can’t try my products, so business stops,” said Wang Zhuanghong, the manager of a household appliances store.
Chinese regulators announced on Monday that they would allow electricity rates to rise in half of China’s provinces by an average of 1.67 fen per kilowatt-hour, or 0.26 cents, for industrial users. The increase, which works out to 2.2 percent, is intended to give electricity companies a greater incentive to run power plants.
But electricity prices would still lag behind spot coal prices, up 36 percent in China since the start of last year. And electric utilities would not be allowed to charge more to residential users, so as to limit inflation.
The power shortages also threaten to trim China’s industrial output over the summer, as the authorities have given priority to residential users during the peak air-conditioning season.
A big source of uncertainty about the Chinese economy hangs over one industry that has propelled consumer spending at a remarkable pace for the last decade: autos.
The swift expansion of the Chinese auto market enabled it to pass the recession-crippled American market in 2009, and then to surpass the highest levels ever achieved in the United States in the total number of vehicles sold. The production and demand have helped underpin high world prices for oil, steel and other commodities.
But sales of cars, minivans and sport utility vehicles grew only 7 percent in April from a year earlier, indicating a further slowing this year after year-over-year sales growth of 20 to 120 percent each month in 2010.
J. D. Power & Associates, the global consulting firm, responded to the weak April sales by lowering its estimate for growth in China’s car market this year to 7 percent, down from an earlier forecast of 11 percent. That works out to 295,000 fewer cars this year than previously predicted.
But some of the biggest reasons for the auto slowdown appear to have nothing to do with consumer confidence. John Zeng, the J. D. Power co-director of Asia forecasting for greater China, said that most of the reduced sales forecast — as many as 260,000 cars of the decline — reflected the effects of the Japan earthquake on the automotive supply chain. China still relies on Japan for nearly half of its automatic transmissions, whose supply will not return to normal until early next year, Mr. Zeng said.
Meanwhile, in bustling Beijing, the municipal government has cut by half the number of license plates it will allow to be issued this year, as a way to fight traffic jams. That move has trimmed China’s projected overall car sales by an additional 4 percent this year.
Some economists say that the government waited too long last year to try to slow the overall economy. They fear that inflation now has such a firm foothold that it could take a serious downturn to stop it.
A step China could take against inflation is to stop issuing billions of extra renminbi each month to pay for intervention in currency markets. The intervention has slowed the renminbi’s rise against the dollar to an annual pace of about 5 percent.
But few economists expect China to stop intervening any time soon.
Consumer prices rose 5.3 percent in April from a year earlier after climbing 5.4 percent in March, according to official statistics. The official figures are widely thought to understate the true extent of inflation, which some economists say actually may be twice as high.
State media have begun to warn the public that inflation may persist a long time. Government-imposed price controls have only delayed, not eliminated, the need to raise prices for services like electricity, for which production costs have risen.
Although Chinese policy makers have plenty of options to reinvigorate growth if they declare victory on inflation, they nonetheless face a longer-term challenge. Many economists predict China’s economy simply cannot maintain its double-digit growth of the last three decades. In fact, the five-year plan starting this year calls for annual growth of 7 percent from 2011 to 2015.
The problem lies in China’s extremely heavy dependence on investment in factories, infrastructure and apartment buildings to sustain growth. The slowly rising levels of debt at local governments and large companies that have financed that investment indicate it may not be sustainable.
At the same time, the economic returns on new highways and other public infrastructure projects are declining, now that the best locations have already been built up, and as planners extend construction to less affluent and more remote areas. While some economists predict this effect will take five or more years to become serious, others warn it could hit sooner.
“Growth will slow significantly in two or three years — the timing will be determined politically,” said Michael Pettis, an associate professor of finance at the Guanghua School of Management at Peking University. “And the slowdown will last much longer than anyone expects — perhaps over a decade.”