As the American economy appears to teeter on the edge of another recession, Europe struggles with a financial crisis and emerging markets like Brazil and India show new weaknesses, China may appear to be in better shape than most countries, economists say. But “better” is relative.
On the surface, economists at the International Monetary Fund and most banks are still estimating China’s growth rate to be over 9 percent this year. China continues to run very large trade surpluses. New construction starts have soared with a government campaign to provide more affordable housing.
And yet, the country’s huge manufacturing sector is starting to slow and orders are weakening, especially for exports. The real estate bubble is starting to spring leaks, even as inflation remains stubbornly high for consumers — despite a series of interest rate increases and ever-tighter limits on bank lending.
Because China’s mighty growth engine has been one of the few drivers of the global economy since the financial crisis of 2008, signs of deceleration could add to worries about the global outlook.
A survey of Chinese purchasing managers, just completed by HSBC and Markit Economics, shows a third consecutive month of contraction in the manufacturing sector. The release of the survey results on Thursday contributed to a global slide in stock markets that day.
Meanwhile, huge loans that Chinese banks have made to state-owned enterprises and local governments over the last three years could cause trouble if the economy does slow.
What’s more, there are further signs of trade hostilities from Washington, where the impulse is to blame China’s cheap exports, at least partly, for America’s continued high unemployment.
On Thursday, a bipartisan group of senators announced that they would pursue legislation requiring the Obama administration to confront China more directly on currency policy. They want the White House to push harder for China to allow its currency, the renminbi, to appreciate.
If China does allow its currency to rise more quickly and if its trade surplus narrows, that could help economies elsewhere. But too much of a slowdown in China could simply add to the world’s financial gloom.
Chinese exporters are particularly worried
Nicole Huang, the sales manager at the Dongguan Lianyi Sport Goods Company, a maker of beer coolers, diving suits and other products in the industrial hub city of Dongguan, said the number of orders had dropped 5 percent so far this year, and the average size of each order had also begun to shrink.
And instead of the labor shortages that plagued many manufacturers last year as workers sought better jobs elsewhere, more people now seem willing to accept assembly-line tedium. Short term, that could help exporters. But it could be an early sign of looming unemployment problems.
“At least it is easier now for us to hire workers who come into our factory looking for work, after seeing our job notices posted outside,” Mr. Huang said. “Before, no one would respond to these notices.”
The sentiments of investors and economists inside and outside China have taken a bearish turn in recent weeks. As global stock markets have tumbled, the Shanghai A-share stock market has fallen 14.7 percent since July 15. That includes a further decline of 0.4 percent on Friday.
The most worried economists are those who follow China’s manic monetary policy. The central bank oversaw a huge stimulus effort in 2009 and 2010 in response to the global economic slowdown, rapidly expanding its issuance of money and then encouraging banks to lend and relend it. Broadly measured, the money supply surged 53 percent in two years.
The extra cash has sent inflation at the consumer level surging to more than 6 percent even by official measures, which tend to understate true inflation for methodological reasons.
With inflation now running at more than twice the regulated interest rate paid by banks for deposits, millions of Chinese have been betting their savings on real estate. That frenzy had been sending property prices through the roof, at least until the last couple of months.
But this year, to fight inflation, the Chinese financial authorities have veered in the other direction, setting strict administrative quotas on new loans. And they have ordered the mostly state-owned banks to park more than a fifth of their assets at the central bank, which further limits the banks’ ability to lend — and businesses’ ability to borrow.
Orchid Chen, the sales director of the Fujian Yuandong Electric Motor Group, which makes motors in Fu’an in southeastern China’s Fujian Province, said that banks were strictly following Beijing’s instructions.
“The smaller enterprises have found it difficult to secure any type of lending from banks,” she said.
“We are a good-sized company and still have support from the banks, though our loan rates have been adjusted upward two to three times this year already.”
Diana Choyleva, a Hong Kong-based economist for Lombard Street Research, predicted that the combination of tighter monetary policy with a likely slowdown in foreign demand for China’s exports would result in the Chinese economy’s growing at an annualized rate of only 5 percent in the second half of this year and the first half of next year.
“Just as the authorities are managing to hammer down demand growth, the rest of the world is not looking healthy, so there’s going to be an export shock,” she said.
Despite the gloomy purchasing managers survey issued Thursday by HSBC and Markit, Donna Kwok, an economist in the Hong Kong offices of HSBC, noted that the survey also showed shrinkage in companies’ inventories of finished goods. So at least short term, companies may need to maintain production to fill orders, instead of meeting them from existing stockpiles.
China has been highly successful in creating jobs and shifting unemployment to other countries through its intervention in currency markets.
This has kept the renminbi weak and made Chinese exports very competitive in foreign markets, even as it has kept imports expensive for Chinese consumers.
That policy, though, could be increasingly hard to continue as high unemployment persists in the West, and Washington lawmakers demand a White House response.
Hong Lei, a spokeswoman for the Chinese foreign ministry, said at a news briefing on Friday in Beijing that appreciation of the renminbi was not the answer to American trade deficits with China.
Many large American companies rely heavily on imports from China and are lobbying against the legislative push.
Within China, domestic demand is starting to weaken slightly. China’s auto market, the world’s largest by number of vehicles sold, looks fairly strong at first glance, with family vehicle sales up 6 percent in August from a year earlier. But that is a significant slowdown, coming after a decade of almost continuous double-digit growth.
More worrisome, the growth in August occurred mainly among Japanese manufacturers in China that were finally filling orders as they recovered from the parts shortages created by the earthquake and tsunami last March. Price discounts have begun to spread, even among multinational brands.
And many Chinese automakers, which have tended to sell the least expensive and often lowest-quality cars, had sharply lower sales in August — particularly of small minivans and pickup trucks, for which government incentives expired at the end of last year.
Then there are real estate prices, which have been soaring in China for more than a decade.
A government survey released on Sunday showed that prices had fallen in August compared to July in 16 cities, notably Chongqing in western China. And prices stayed flat in 30 cities, including Beijing and Shanghai, although they did continue rising in 24 other cities.
The hardest question to answer in China is whether slower economic growth and continued inflation could lead to more social tensions, which in turn could damage the economy through weaker investment and more cautious spending.
Though blue-collar wages have surged over the last decade, tripling in some coastal provinces, the salaries for many white-collar workers, particularly recent college graduates, have been trailing inflation.
The central government banned local taxes and fees in rural areas six years ago. And it has been talking for years about whether to start assessing property taxes instead; so far it has experimented with that approach in only a few cities, notably Chongqing and Shanghai. Without a broad base of property taxes, local governments across China raise much of their money by seizing land from peasants with minimal compensation based on the value of recent harvests, rezoning it for industrial or commercial use and then selling the land for far more to developers.
Roy Prosterman, the founder and chairman emeritus of Landesa, a rural development policy group based in Seattle, said in a speech in Hong Kong on Thursday that the group’s surveys in China had found that peasants typically receive only one-fifteenth of what developers pay for land in these deals.
The news media have reported a spate of protests in recent months in rural areas, including riots this week in the southern province of Guangdong. But protests have erupted periodically for years and there are no reliable national statistics on whether the overall number of protests is rising or falling.
Hilda Wang contributed reporting.