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.
Image Source | Getty Images
China announced Thursday that growth in imports had unexpectedly come to a screeching halt in April — rising just 0.3 percent from the same period a year earlier, compared with expectations for an 11 percent increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore and 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 depend on demand from China’s voracious steel mills and ever-growing ranks of car owners.
Exports, a cornerstone of China’s torrid economic growth over the past three decades, grew only 4.9 percent last month — half as fast 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. Soufun Holdings, a Chinese real estate data provider, released figures Monday showing that residential land sales in the country’s 20 largest cities had fallen 92 percent last week from the week before, as declining prices for apartments have left developers short of cash and reluctant to start further projects.
In a series of interviews over the past week, bankers and senior executives from provinces all over China, in a range of light and heavy industries, 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 crunch, 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. Zhang Jinmei, the sales manager at Qitele Group, a company that makes playground equipment in the coastal city of Wenzhou, said that local investment and lending pools there were starting to charge higher interest rates for loans, a sign of worries about creditworthiness.
“The business environment is getting tougher and tougher,” said Tom Zhang, the sales manager at 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.”
To be sure, some sectors are faring better. Car sales rose 12.5 percent in April from a year earlier, the Chinese Association of Automobile Manufacturers announced Wednesday. A clearer signal of China’s economic health may emerge Friday, when the National Bureau of Statistics announces April figures for industrial production, inflation, retail sales and other key economic indicators.
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 on 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. The Communist Party removed him March 15 as the party secretary in Chongqing and suspended his membership in the Politburo and the larger Central Committee on April 10.
On March 12, three days before Mr. Bo lost his job in Chongqing, the governor of the Chinese central bank, Zhou Xiaochuan, strongly hinted that the government was prepared to lower the reserve requirement further, but it has done nothing since then to follow up.
“We have a lot of room to adjust the reserve ratio,” Mr. 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 Thursday 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 as investors appeared to conclude that the government would respond with economic stimulus.
GaveKal Dragonomics, a research firm specializing in the Chinese economy, said in a report Thursday 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. And while commodity prices have begun to weaken worldwide on worries about Europe, they have particularly slumped in China in the past few weeks, according to corporate buyers and specialty data tracking services.
Prices in China for cold-rolled steel, used in car production, and silicon steel, used in electric motors, have been steadily declining for the past two months. Prices for other metals, like nickel and aluminum, have been eroding this spring, as have prices for widely used materials like cement and nylon.
The result is a lot of unhappy business executives. “Our industry sector is facing tough times, and some companies in our sector are struggling,” said Amanda Wang, the sales manager at Steady Shower Technology, a manufacturer of bathroom fixtures in Ningbo.
Hilda Wang contributed reporting.