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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  • Comment number 40.

    This comment has been referred for further consideration. Explain.

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    Comment number 34.

    #12rjbroch "China's economy is starting to fail."

    Sometime soon it can happen and then the Tibetan monks will have such a great life in Tibet, working for a living and no time to beg for food.

    Maybe they can be like Jamaica and other caribb nations or be like some African countries like Kenya, they can all serve the westerners as free servants and stay poor in the slumming it democrazies.

    Not that I like the commies but they are making China the one to fear and kicked out the sick old man of Asia.

  • Comment number 33.

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    Comment number 32.

    What's wrong with this Chinese guy Li?

    Is he nuts or just showing off to his buddies in Africa or to the west.

    Li wants Chinese money to go into the money pit of Africa, the black hole made bigger and wider by the westerners for over a 100 years.

    China should send him to the USA for a Harvard edumacation.

    Keep all the money in China, do not buy Canada's failing companies or stuffs and let the west burn like Rome did then buy it all cheap later.

  • rate this

    Comment number 31.

    This foreign and western worshipping in the Chinese leadership has to stop and the new leaders need to move away from showing off to the west.

    Other things China can do is to allow all Asian or ASEAN countries to go under and teach them a lesson is fake respect of China's status as no 2.

    Let them eat from the trash cans for awhile and they will be on their knees and kowtowing like hungry dogs at the master's feet.

  • rate this

    Comment number 30.

    Best thing for China's new leaders to do is to open China's doors wide and let as many Chinese who want out of China to leave and go over to western nations, to take over the foreign companies and businesses there.

    Only Chinese have money to buy China's products and goods.

    And China better not give away the poor Chinese people's money to the rich westerners or there will be trouble in Chinatown BJ.

  • Comment number 29.

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    Comment number 28.

    "Chinese millionaires live overseas because China is densely populated,so what ? Even British Millionaires move abroad to Switzerland."

    Switzerland being less densely populated than China?

    And is that why Chinese billionaires move their families and their assets) to such vast and scarcely populated countries like Monaco and Singapore? :-)))

  • rate this

    Comment number 27.

    Re #4 Soppie: "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."

    Protests are already growing, especially in poor rural areas. However a substantial increase of Chinese people's income ( to stimulate domestic consumption) can result in 2 things:

    1.much higher inflation, and, more importantly

    2. elimination of China's only advantage in the global market,
    which is its dirt cheap labor (manufacturing costs).

  • rate this

    Comment number 26.

    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"

    Question: how much time to EU bosses have to pull its eurozone out of recession?

    Btw. China, as a developing country needs ca 10% growth to sustain its fast growing population (while highly developed countries need no more than 5%). But it has dropped from the predicted 12% to merely 7.6% several months ago, and at this point is probably nor more than 7%. While that one trick pony can neither stimulate export, nor its domestic consumption

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    Comment number 25.

    China's current leadership are 1-trick ponies. They've grown accustom to promoting economic growth via beggar-thy-neighbour policies that transfer wealth and prosperity of their trading partners to China's industrial-political elite. Now the ROI on stimulus is weakening rapidly they're once looking to "export" their way out of their problems on the back of a world that is tapped out. How long can this continue? Hopefully the next leadership has the guts to look at the difficult measures needed to improve the domestic situation such as improvements in the health care and social security system.

  • rate this

    Comment number 24.

    The last thing China needs is so called economic experts in the US and Europe telling them what to do. We have only to look at the unmitigated mess caused by the US and the banks. China as always will take its own advice. The US is still a disaster and causing trouble in the middle east. Chien will nto stand by and see foreign governments interfere in tis internal affairs when ti does not do so.

  • rate this

    Comment number 23.

    Isn't this article just a re-hash of the original Reuters report?

  • rate this

    Comment number 22.


    There are many successful democracies in the world not just in the US. I'm English, but constant US bashing is getting predictable and tedious. They are an easy target as they always stick their neck out, but criticism in this regard would probably be more productively aimed at countries such as China, Burma, etc etc.

    With regard to the topic, I would have thought that a lower and possibly more sustainable growth rate for China would be a good thing.

  • rate this

    Comment number 21.

    "Hope all you free Chinese enjoyed voting for your new leaders"
    you seem to think America is a Democracy HAHA who won Florida in 2000 ? Who controls the Media ? How many Americans have been brainwashed into being addicted to MTV ? How Many Super Pac Billionaire backers do you need to run for President ? Who elected the Federal Reserve Chief ? Who voted for NDAA and SOPA ? Who voted for Iraq war ? consent is manufactured in the west.

    The Communist Party has over 1 million membres represents people from all walks of life in China.Singapore $40,000 per no need for 2 party 'democracy;


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