Once Hot Chinese Economy Cooling Off
It seems the red hot Chinese economy is starting to feel the effects of the global recession. Lately every new forecast of China’s economic fortunes predicts slower and slower growth rates. Just as China attained supercharged growth that astounded much of the world, it appears to be slowing more sharply and more quickly than anyone could have anticipated.
“It’s tough to be optimistic,” said Stephen Green, an economist at Standard Chartered Bank in Shanghai. “The three engines of growth, exports, investment and consumption, have all slowed down.”
The signs are so troubling that last week Prime Minister Wen Jiabao warned that this year would be “the worst in recent years for our economic development.”
A series of government reports have indicated that China’s export juggernaut is slowing greatly. Real estate construction projects are being suspended. Consumer confidence is in sharp decline. And many factories in southern China are closing, putting tens of thousands of migrant laborers out of work and on the streets.
Some Chinese companies have even reported that Christmas orders, supposed to be placed in late summer or early fall, were down 20% this year, as big retailers and toy marketers grew gloomy about the holiday season. Until recently, many economists had insisted that China was insulated from the global financial crisis rippling through, and that the Chinese Communist Party had the tools to keep the economy moving along. But newly released data suggests that nearly every sector of the economy is slowing and credit is tightening fast in a nation that has grown accustomed to sizzling growth.
While few economists expect China to fall into recession, analysts are forecasting the worst growth in more than a decade, with the economy expected to expand by as little as 5.8% in the fourth quarter this year, down from about 11% in 2007. Analysts worry that a sharp downturn could undermine the country’s already weakening investment climate and impair some of China’s biggest banks, which have bankrolled much of the boom.
Beijing worries that if growth slows to 8% or less, not enough jobs will be created in a country that is rapidly urbanizing, and that could lead to social unrest. To prevent that, the government is preparing a large economic stimulus package, pushing new infrastructure projects, offering aid to exporters and searching for ways to prop up the nation’s severely depressed stock and real estate markets.
Less than six months ago, the government’s chief concerns were soaring inflation and an economy that was growing too fast. Now, inventories are piling up around the country as domestic and foreign demand for Chinese goods slackens. In southern China, the government has had to step in to aid migrant workers after factory closures. Indeed, when the Canton Trade Fair ended this week in the city of Guangzhou, orders at one of the biggest events for Chinese products were down significantly, and so were visitors, according to participants.
But it is not just export-oriented factories that are being hit. Companies that sell in China are also suffering because investment projects are being postponed and consumers are pulling back on major purchases. After five years of growth over 10%, China’s growth rate has decelerated for five consecutive quarters, dropping from 12.6% in the 2nd quarter of 2007 to about 9% the 3rd quarter of this year.
That growth rate is still strong, but economists say the downturn began sharpening recently. At many factories, large Christmas orders were canceled. Earlier this week, the government announced that China’s purchase management index, which is used to measure the country’s economic performance, fell in October to its lowest level since tracking began in 2005, indicating that orders of all kinds had fallen sharply.
Auto sales in China have plummeted this year. Air travel is in decline. Property sales have dried up, and weakness in the property market is hitting the makers of steel, cement and glass.
“There is a nose dive in real estate construction in south China and east China, the two real estate boom areas,” said Yang Dongsen, a cement industry analyst at Merchant Securities. The real estate slowdown is expected to affect retail sales, which for the last few years had been lifted by new-home buyers purchasing appliances, decorations and other household goods.
It does not help that China’s stock markets have also collapsed, after a stunning rise in 2006 and 2007. Share prices in Hong Kong are down about 50%, and the Shanghai composite index has fallen 67% this year, wiping out nearly all the gains it had made in the previous two years. Many economists say they believe that government stimulus packages will stabilize China’s economy and prevent an even steeper decline in growth, and that the economy could pick up steam by the second half of 2009.
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