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

    Comment number 60.

    I got the impression that rich Chinese tend to spread their money around outside of China because they are afraid their 'communist' government might actually start behaving like a communist government.

  • rate this

    Comment number 59.

    Just in, there will be a dire impact on the western economies if China was to have a harder landing, like what BBC wishes for.

    Most of the west will not survive the crisis ending up as being the same as the 3rd world countries and China will go back to eating one bowl of rice a day with gold chopstix.

    But China will have the money and cash to buy most of the west, cheap.

  • rate this

    Comment number 58.

    S/B...they shouldn't wast their money on a fail western system.


    In the South China seas the RIMPAC is under way, this U.S.-led naval manoeuvres in which Canada plays an unusually lead role.

    Canada says, "China will no doubt conclude that we have already taken sides."

    This is what China needs to know, Canada is playing the old game of take the money with one hand and hold the axe over it's head with the other.

  • rate this

    Comment number 57.

    #54 ....... Canada lets in more from India than China, and the many rich Chinese that come here are criminals that get sent back to China.

    China must keep all it's money at home, they should wast their money on a fail western system.

    Know that cash is king.

  • rate this

    Comment number 56.

    China has been making similar mistakes as the rest of the world. China is copying everything and our mistakes too. They have been lending too much money with out proper regulation and sense. They have been building so many un needed buildings which helps but is a temporary fix for jobs and the economy. What they could of done is provided low interest loans to Europe to save the Euro which is the real problem in the world which needs a full proper effort to stabilise the world's economies.

  • rate this

    Comment number 55.

    The Chinese masses are being held back by the capitalists in their midst. They need a communist revolution to ensure all workers shared wealth equally...Oh wait...


  • rate this

    Comment number 54.

    I think the real question going forward in the the balance of power in the world is, quite simply, where will a highly mobile, educated population choose to live? Many, many Chinese people with money are desperate to move to the US, UK and Canada and are doing so in droves. I mean, just think about it - it's probably a nice place to visit, but would you* want to live there under a ... to be generous ... let's call it "restrictive" culture and system? No. And, increasingly, neither do they.

  • rate this

    Comment number 53.

    In 1961 Nikita Khrushchev boasted that "pretty soon Soviet Union will catch up with USA and take over".

    Merely 30 years later USSR was no more.

    How many Chinese Communist propagandists here truly believe that PRC will do any better vis-a-vis U$A?

  • rate this

    Comment number 52.

    re Chinese billioners mving out becasue "China is densly populated".

    Switzerland being less densely populated than China?

    And why do Chinese billionaires move their families and their assets to such vast and scarcely populated countries like Monaco and Singapore?

  • rate this

    Comment number 51.

    China's policy chiefs have about 2 weeks 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.
    1. Maybe Chinese leaders do not think like Westerners.
    2. Westerners have proven stimulus is artificial, goes to the banks and does not work.
    3. When export market is not there, China needs to emphasize domestic products.

  • rate this

    Comment number 50.

    What Salmond gets up to is irrelevant in the general scheme of things, but I wonder what the decent people of Scotland think about having such an unscrupulous has-been in charge. China needs to tread a fine line between gently stimulating the home economy but not producing too much for its depressed export markets in the West. In a couple of years things will be better in Europe and the USA and the West should start to think about producing again. China's manufacturing costs are already escalating. The era of plentiful cheap goods is coming to an end - thank God!

  • rate this

    Comment number 49.

    @ 'yowatusay'
    Why are you so unpleasant? Ancient proverb says - those who grind the same axe too long will eventually lose the blade.

  • Comment number 48.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 47.

    I can't see China being affected by these figures. She is an enormous continent with massive natural resources. The only people who may be affected will be her elite and global hedge funds.

    Literacy rates are now higher in certain regions, but lacking in others. If China stopped exporting tomorrow, it would make no difference to it's self-sufficiency.

    A decade of business out-sourcing to China has caused huge unemployment in their own countries, thus less demand, therefore contraction of home economies.

    We are all guilty of buying into that narrow and over dependent model to our demise.

  • rate this

    Comment number 46.

    This is what it is, China will need to export over 30% of their older population to the west and make more babies from 2 or 3 per family to keep up with the work force demands of the country.

    Save their money and spend it at home, let the EU burn.

    Put same Chinese in school and the rest on welfare, as the west grows back so will China.

    By 2016, China will be no. 1 and the USA will be making the cheap stuffs again and the EU, with no money who cares.

  • rate this

    Comment number 45.

    Scotland is nervously watching China, because the SNP have been schmoozing the Chinese even to the extent of ignoring the Dalai Lama and Aung San Suu Kyi on visits to Scotland. Yesterday we learn from the press that Salmond has had dealings with corporations guilty of human rights abuse.

  • Comment number 44.

    This comment has been referred for further consideration. Explain.

  • rate this

    Comment number 43.

    The only boost they can ever give to their economy -- take better care of your workers and stop exploiting them!

  • rate this

    Comment number 42.

    In general I think politicians and economists are kind of comedy stars. On one hand we want to save our planet, on the other hand we are speaking about boosting economies...?

    What does this mean: Boost an economy?

    Produce more, consume more, have more waste, make our planet dirtier, give even more money to banks, and owe more money finally.

    Honestly - I think we should not speak about economic growth.

    We shall speak about less production, products with higher quality and longer life time, use less resources and better protect our environment.

    Money is just an invention and power tool.

  • rate this

    Comment number 41.

    stimulus is good because it keeps people employed so that they can pay their bills. However wasting stimulus money on bridges to nowhere, or ones that collapse, or building homes that no one needs or can afford will only make the crunch worse. China is the worlds greatest imitator of the west, including our faults, such as the elite


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