China's economic conundrum

 
File photo: A Chinese worker at a thread factory in Fujian province There are growing signs that China's economy is weakening ahead of its major leadership change

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China's leaders are facing a conundrum. They're preparing to hand over power to a new generation in the autumn.

But look at all the data rolling in and it seems the current Communist leadership could be stepping aside just as China's economy is at its lowest ebb in years. So should they try to give things a boost, or will that make any problems they pass on to the new leadership worse?

This weekend, Premier Wen Jiabao was touring the southern manufacturing heartland of Guangdong. It was his third visit to China's economic heartlands in recent weeks.

He used it to make a very public call for greater efforts to support exports. They're one of the key drivers of China's economy, but look to be flagging.

According to Xinhua, Premier Wen said: "The third quarter of the year is a critical period for China to realise the year's export growth target and we should take targeted steps to stabilise growth."

"Wen said that judging from the new export indexes, China's export outlook will continue to be clouded by difficulties and uncertainties," the news agency reported.

Economic measures

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Recent efforts by China's leaders to engineer a turnaround don't seem to have worked”

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China's official goal is to expand exports by 10% this year. But July's figures showed export growth had slumped to just 1%, largely because of collapsing demand from Europe. Premier Wen's problem is that there is little he can do about the eurozone's troubles.

But to try to help things along, the premier has, according to the Global Times, "proposed that the government speed up the export tax rebate process, expand export insurance coverage, reduce inspection fees, encourage financial institutions to improve their services on hedging against currency exchange risks, and keep attracting foreign investment".

Those are all measures that will take time to filter through. Meanwhile, the Communist Party has only a few weeks before the expected Party Congress in the autumn, when the leadership change will happen.

And there are growing signs the economy is still weakening. As we report today, profits at industrial firms in China fell by 5.4% in July.

China's banks have also been in the spotlight. China Construction Bank, one of China's "big four", said on Sunday that profit growth has fallen to its slowest level since 2009. Last week another of the big ones, Bank of China, said the same.

And also last week were signs that output from China's huge manufacturing industries fell again, to its lowest level in nine months.

Slowing economy?
File photo: Labourers at a construction site in China Investment spending already accounts for 50% of the economy

Put all this together and you have an economy that looks like it is still slowing, despite the predictions that China would rebound in the first or second quarter of this year.

Recent efforts by China's leaders to engineer a turnaround don't seem to have worked. They have already cut interest rates twice, released more money into the economy by cutting bank reserve ratios, and announced a raft infrastructure projects.

The way to change things now would be to pump more money into building projects - and fast.

But investment spending already accounts for a huge 50% of China's economy. The massive stimulus used to get China through the financial crisis led to inflation, worries about bad debts and soaring property prices and the government has been working to rein those in.

So if they do more now to achieve a short-term boost before the autumn Party Congress, then the result down the line could be a new, nasty bout of inflation, unpaid loans, and surging house prices, things the leadership says it's determined to avoid.

As Reuters says in a new analysis today, "China's policy chiefs have about two weeks left to decide about giving the economy a proper stimulative prod, or risk parading a new Communist Party leadership to the world just as growth falls below target for the first time in nearly four years."

For a political party that has long staked its right to rule on its record of economic competence, it's tricky place to be. The leaders have already cut their projection for economic growth to 7.5% this year. It means they will be handing over an economy growing at its slowest pace in 13 years.

But as Tim Condon from ING in Singapore tells Reuters, China's outgoing leaders would be well-advised not to try to go for a quick injection of money into the economy now because "a bad year is not the end of the world for the party. The new leaders come in, turn things around in 2013 and look like heroes".

And Mr Condon adds that by refusing to have an "aggressive stimulus" now, the outgoing leadership are taking the wise path.

"What they seem to be saying is that they are not going to take the easy way and double down on the command and control policies, but stay on the course of market-oriented reform. That's a really positive story - if it's true."

 
Damian Grammaticas Article written by Damian Grammaticas Damian Grammaticas China correspondent

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  • rate this
    -6

    Comment number 20.

    How can China crash when it has not even Peaked ? you are yet to see the full potential of China, so your thinking is wishful. China may not grow at 10% but even 5% is amazing.

    Hostility with the US ? is costing nothing, the US spends more on defence than rest of the world combined, its US that cant afford it.

    Chinese millionaires live overseas because China is densely populated,so what ? that wont affect its economy.Even British Millionaires move abroad to Switzerland and Panama.

    GNI is irrelevant, Mass Increases in productivity and Output is the real deal

  • rate this
    0

    Comment number 19.

    There would not be empty estates and even towns standing in China if they were shared equally among the people. I have come to think that capitalism doesn't suit China.

  • rate this
    +2

    Comment number 18.

    The capitalist style economic boom is artificial and will come to gradual then total halt. It depends on false accounting economy boosting disproportionately on relationship who knows whom and targeting only a part of world population. The majority can not reach any boom ( africa Asia South America)world full of corruption and greed(India for example).
    The Equity and capitalism is corrupt and betraying most of honest hard working work force only benefiting few rouge on secured places with relationship and protected by law. World has to change.

  • rate this
    +5

    Comment number 17.

    So... Who do they export to?
    Europe? America?
    Kind of explains their problem. Perhaps they need to enact policies which would enable their own people to enjoy some of the wealth they are exporting. They can do that by allowing their currency to become stronger.

  • rate this
    -1

    Comment number 16.

    Let them go them.

  • rate this
    +1

    Comment number 15.

    It might be an idea now that they consider how to manage their population numbers, as all governments will have to do sooner or later.

    They and we can manage our numbers now or wait until resources are exhausted with the consequential strife and suffering that will bring !

  • rate this
    +1

    Comment number 14.

    As it is with any other economy around the globe, we have reached a stage where the flaws/corruptness of our present monetary/economic system are coming to the surface in an unstoppable fashion. The countries with high population numbers will be suffering the most. For your information Google The World Monetary Order to Come.

  • rate this
    +1

    Comment number 13.

    I hope China does not do another major stimulus, all these seem to result in is more debts, empty housing estates and higher inflation.
    Surely the rest of the world's rising standards of living will keep it buying Chinese products.
    The whole world has to keep reducing debt slowly and hang in there for a few years.

  • rate this
    -2

    Comment number 12.

    Hope all you free Chinese enjoyed voting for your new leaders who are about to become the new Beijing Gang LOL. China's economy is starting to fail, because it cannot sustain growth levels just by cheating on yuan value, building millions of buildings that are not lived in, moving farmers to cities with no jobs in them, using free labour by dissidents, Tibetan monks etc housed in labour camps. Its economy will slowly decline and China will never become a rich country until it becomes a free country where , as the TS students wanted, people live in freedom and dignity.
    Commie China is a blight

  • rate this
    +3

    Comment number 11.

    They have already boosted the economy massively in 2009 and 2010.

    The challenge now is to engineer a soft landing which will still produce bank failures and other dislocation.

    The on-going challenge to the highly over-leveraged West is that Chinese surpluses have built up in Western Debt instruments. A faltereing China will create difficulties in the re-financing of old debt and the up-take of new issuance.

    Debt is bad news unless it is controlled and not used for short term political advantage in bribing their electorates with unearned social benefits.

  • rate this
    +1

    Comment number 10.

    Perhaps they can try to be an agrarian, import based economy instead, that's worked out so well for the US /end sarcasm.

    I'm waiting for someone to have the guts to call them out on all the shenanegans they've used to prevent the yuan from properly appreciating against other currencies and their permissive attitude towards cost-cutting measures which would be illegal elsewhere.

    I want a ban on all imports not made under conditions which satisfy our labor and industrial laws. If producers had to pay our minimum wage and meet our safety requirements to sell to us, industry would come home.

  • rate this
    -1

    Comment number 9.

    The outgoing leadership should do nothing.
    If I was the incoming leadership, I would not want "old" policies impinged onto my new start.
    Besides China is not an impulsive country; it is generally contemplative & research-oriented. There's nothing to be done in the short-term because China seems to be doing a lot better than most western countries anyway.

  • rate this
    +1

    Comment number 8.

    Try telling the 'Toiling masses' all the above. If the current leadership are handing over power to others soon...a poisoned chalice springs to mind!

  • rate this
    -9

    Comment number 7.

    The best policy for China is to aid Euro region, for example, Greece and Spain. This in long term will restore the market for export of China. China can do it with her immense foreign exchange reserve in ways complementary to those of Euro Central Bank.

  • rate this
    -2

    Comment number 6.

    China is the place where industry goes to manufacture when processes are dangerous, tedious, repetitive, require little real skill or education, are labor intensive, because there are no penalties for whatever is done to the environment, to workers, to anyone or anything.Labor is dirt cheap, life is dirt cheap.Workers obey or they're in big trouble.Fired by their employers or put in prison if they protest.By western standards we throw them crumbs and keep most of the profit for ourselves.They exist to be exploited.The more ignorant of their real situation the happier they are

  • rate this
    +3

    Comment number 5.

    China is a country in serious trouble.It's image as an economic superpower is an illusion.It's GNI and GNI per capita that matters, especially in non PPP terms, not GDP.By this standard China is a very poor country indeed. It has countless problems each of which would be terrible by itself. Aging population, massive pollution, dependence on exports during recession, fragile banks, bubble real estate market, massive corruption just for starters.Hostility towards the US hurts it.Even its own wealthiest people want to live elsewhere.China can't be fixed.This is the start of a long term decline.

  • rate this
    +1

    Comment number 4.

    Government plays a key role in china's economy,and it's hardly conceived by other country people. just as this article said, the Chinese government's legitimacy came largely from its economy progress, and when this doesn't exist any more, the social conflict will definitely be more radical

  • rate this
    +5

    Comment number 3.

    There's little point in China or the Americas for that matter, (Brazil and the like)trying to boost their economonies with yet more growth when over half to 2/3rds of the rest of the world are in or near to being in recession.Just who is there left for these countries to export/sell to?

  • rate this
    +1

    Comment number 2.

    It seems like the global spending bubble is sagging all round. Lets hope political change brings more than more than new power stations and cheap goods.

  • Comment number 1.

    This comment was removed because the moderators found it broke the house rules. Explain.

 

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