China’s quest for double-digit growth is over, a clear sign it will no longer be the same economic engine that helped pull the rest of the world out of the last meltdown.
China’s economic growth slowed in the third quarter to an annual pace of 9.1 per cent from 9.5 per cent in the second quarter and its lowest point since the autumn of 2009.
The measure of gross domestic product released Tuesday comes amid fears of another global slowdown, particularly as Europe lurches through a crippling debt crisis and U.S. growth slows. Slower growth could mean reduced demand for exporting countries, which is why global markets tend to shiver at Beijing’s data.
“From a macro perspective, the days of pursuing double-digit growth have changed, and changed in a way that the government no longer thinks the higher the better,” said Huo Deming, an economist in the National School of Development at Beijing University. “For the year 2011, an overall average growth rate under 10 per cent is foreseeable.”
The number, though slightly lower than expected, is in line with the Chinese government’s goal of a controlled slowing of growth to manage stubborn inflation, referred to as a “soft landing,” as opposed to a crash. Earlier numbers released Friday showed inflation dropped for a second successive month and now sits at 6.1 per cent, still uncomfortably high in a country where millions live in poverty and rising costs of food and housing pose a threat to social stability.
The People’s Bank of China has relied primarily on interest rate hikes and increasing banks’ reserve ratio requirements to combat inflation, along with heavy regulation of the property market.
It seems to be working, but at a price: GDP growth is slowing, growth in fixed asset investment has dipped and so has investor confidence. An offshoot of the country’s sovereign wealth fund last week announced plans to buy up shares of four of China’s biggest banks, all struggling in an after-stimulus-spending hangover of bad loans. China’s heavily censored news media run regular articles about small and medium-sized private enterprises forced to close because tightened monetary policy has made obtaining new loans virtually unattainable.
Two major indicators in assessing China’s economic activity – steel output and power generation – were also down in September, the result of tightened lending, slowing exports and a freeze on China’s ambitious railway expansion after a series of accidents. Power generation was down 9.4 per cent from August, to a four-month low, while steel fell 3.5 per cent from the previous month.
“It’s very hard if you face a trade-off between the two, macroeconomic stability and high growth,” said Li Lixing, an associate professor of economics at Beijing University. “I don’t think monetary policy will be loosened in the very near future … It’s already tight enough and there are many small businesses going bankrupt because of the tight monetary policy.”
Despite these eerie echoes of the kind of credit crunch that triggered the 2008 global crisis, most economists and analysts are still cautiously optimistic about China’s economic course.
“This slowdown in China primarily reflects the impact of domestic policy-tightening measures put in place over the last 12 to 18 months as part of Beijing's efforts to curb price pressures,” Brian Jackson of RBC in Hong Kong said in a note to clients. “So far, there remains little sign that China is about to experience a hard landing as severe as that seen three years ago, and we continue to forecast a further gradual moderation in the months ahead. Clearly, though, risks to the outlook are skewed to the downside.”
At HSBC, co-head of Asian research Qu Hongbin also renewed predictions of a soft landing.
“While external slackness will likely bite China's exports growth in the coming months, the strength of domestic demand should keep the economy growing at around 8.5 to 9 per cent in the coming quarter,” he said in a research note. “Fiscal tweaks and targeted support for [small and medium-sized enterprises] should help China avoid a hard landing, making an across-board easing in monetary policy unlikely in the immediate future.”
The numbers were not without good news, particularly for the average Chinese worker: The income of both urban and rural dwellers increased in the first nine months of the year, even when adjusted for inflation. Actual growth after inflation for urban residents was up 7.8 per cent; that for rural residents was 13.6 per cent.
Increasing domestic demand for China’s own goods and services was a major focus in the massive Chinese government stimulus spending package issued three years ago, and continues to be part of policy makers’ struggle to rebalance China’s economy away from its reliance on cheap exports.
At Beijing University, Prof. Huo described China’s current residential consumption rate, amounting to 33 per cent of GDP, as “ridiculously low.”
“If China is going to pursue a lower economic growth rate … my conjecture is that China is going to focus more on domestic economic issues,” he said, among those being wage increases and improving job opportunities to help boost consumption.
The message that comes through loudly is that China, now focused on its domestic economy and lacking the freedom to spend its way out of recession a second time, will not provide the same global support that it did the last time around.
“For other countries to rely on China as a source of inexpensive products, that is going to change … How China is going to catch up with the rest of the developed world – I think that is going to be a major issue,” Prof. Huo said. “The rest of the world had better be prepared for this kind of a changing growth pattern, and see how they can adjust to that.”
Special to The Globe and Mail