Why more Chinese stimulus may not be in the cards

Slowing growth would seem to point more economic stimulus in China, but Beijing may not have as many options as it used to.

The latest numbers from the government, reported Tuesday, show the country's gross domestic product expanded by 7.3 percent in the third quarter—below the 7.5 percent pace in the prior quarter, but a bit ahead of what forecasters were expecting.

Many forecasters expect China's historic economic expansion to continue to slow through the rest of the decade.

The deepening weakness on China's $9 trillion economy poses a major challenge for China's leaders, who are meeting in Beijing this week for a long-planned summit on political and legal reforms.

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After a massive stimulus in 2008—more than half a trillion dollars invested in new roads, airports, real estate and state-owned companies—China resumed its red-hot growth pace by the end of the decade. But this year, with economic expansion slowing around the world, China's heavily export-driven gross domestic product has fallen below the government's 7.5 percent target.

"Other than the U.S., every other major export market—especially the eurozone—is looking very weak," said Eswar Prasad, a professor of trade policy at Cornell University.

In China, slowing domestic consumer demand poses a thorny problem for leaders as they struggle to transform the nation from an investment-dependent to a consumer-driven economy. Though the 2008 stimulus propped up growth in the short run, it left the Chinese financial system with a massive hangover from money-losing, state-owned businesses and piles of bad debts.

The pace of spending by local and central officials rose in September by 9 percent from a year ago, compared with 6 percent growth in August, according to Tuesday's report. But that was well below the 26 percent pace in the second quarter, when the government announced targeted stimulus measures.

"They don't want to go back to the playbook of 2008-09," Prasad said. "They want to use targeted, selective measures that provide some stimulus but without backtracking on reforms. It's a very difficult balancing act."

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Those efforts are further complicated by the ongoing real estate slowdown, which could become a bigger damper on household spending. Property represents about two-thirds of China's household wealth, compared with about 30 percent in the United States, according to a 2013 Capital Economics survey.

Slower consumer spending and weakening output growth are also weighing on commodity prices worldwide, as demand for raw materials from Chinese manufactures weakens.

"Deflation pressures are on the rise, and it's largely because of the weakness of domestic demand," said Donna Kwok, senior China economist at UBS.

Ordinarily, that weak demand should be good news for buyers of Chinese exports. But even as the U.S. dollar has been gaining this year against most currencies—making foreign products cheaper for American consumers—China has been keeping a tight rein on exchange rates to minimize the impact on its local currency, the yuan, said High Frequency Economics chief Economist Carl Weinberg.

A residential construction site in Beijing, China.
Brent Lewin | Bloomberg | Getty Images
A residential construction site in Beijing, China.

Despite the slowdown in global demand, China's export sector held up surprisingly well in the most recent quarter; the country's average monthly trade surplus during the latest quarter rose to $42.7 billion, up from $17.2 billion during the first half.

But the slowdown in China's once-booming real estate market is apparently deepening, despite efforts by Beijing to prop up prices with looser credit.

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Those measures may not go far enough to make a dent in the backlog of unsold properties in China's rapidly growing urban centers after an epic building spree. In a separate report earlier this month, the government announced that by the end of September, it had largely met its 2014 public housing targets of 7.2 million new units started and 4.7 million units completed.

"That means that demand for key inputs like cement, steel and panel glass sectors, already suffering, may face further downward pressure in the final quarter," said Capital Economics China Economist Brian Jackson.