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

Related Stories

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

Start Quote

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

End Quote

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

Uncovering China's illegal ivory trade

Demand for ivory in China has pushed levels of poaching to new highs. The BBC's Damian Grammaticas investigates China's illegal ivory traders.

Read full article

More on This Story

Related Stories


This entry is now closed for comments

Jump to comments pagination
  • rate this

    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

    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

    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 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.

  • 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.


Comments 5 of 60



BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.