China's hot economic engine helped propel the world out of the last recession, but those fires appear to be cooling under threat of a double dip.
This week, the International Monetary Fund scaled back its projections for GDP growth in China, and an HSBC flash purchasing managers' index projection fell below 50 for a third-consecutive month, driving markets down and feeding fears that, this time, even the world's second-largest economic engine will not be able to help drive the global economy.
"China is a kind of barometer for the world economy, so [slowing]in the Chinese economy does spell, at least in the short term, a weakening of global demand," said Li Wei, a professor of economics with Beijing's Cheung Kong Graduate School of Business. "Countries [that were]largely pulled by the Chinese demand out of the last recession, with China weakening, cannot rely on China being the locomotive for growth any longer."
The IMF cut its forecast for China's GDP growth slightly for this year, from 9.6 per cent to 9.5 per cent, and lowered its 2012 forecast from 9.5 per cent to 9 per cent.
Though the numbers are still enviable, and above the 8-per-cent policy target outlined by Chinese leaders earlier this year, the slip coincides with evidence that China's manufacturing industry is slowing.
On Wednesday, HSBC released its flash PMI at 49.4, down from August's final number at 49.9 and only slightly higher than July's 49.3 – all three numbers indicating contraction. Analysts said output was down, new orders were flat, new export orders declined slightly and input prices rose to a four-month high.
"Growth continues to moderate but the economy is still cooling at a controlled pace. With less dependence on net exports, China's resilient domestic demand should support around 8.5- to 9-per-cent growth in coming quarters," wrote HSBC economists Qu Hongbin and Sun Junwei.
At stake for China are efforts to moderate continuing inflation without unduly slowing growth, particularly given the gloomy climate outside its borders. Analysts speak of the need for a "soft landing," and say central policy makers are still on track.
But the slowdown is particularly worrying for countries such as Canada, Australia and Brazil, for whom China is a major buyer of raw materials. And some economists question whether China's "soft landing" is healthy in an economy that has been so artificially stimulated by massive government spending. When recession hit in late 2008, China unveiled a 4-trillion yuan ($570-billion U.S.) stimulus package, which kick-started its economy but left in its wake massive amounts of excess liquidity.
Combine that credit-fuelled growth with an increasing number of bad bank loans and a property market bubble, and some economists say China may have difficult economic times ahead, though it's unclear when the correction will come.
"I see a much more severe correction coming than any of these numbers envision," said Patrick Chovanec, an associate professor in Tsinghua University's School of Management and Economics in Beijing. "In the end that will be a good thing. China needs a correction, But the longer China puts off a correction the longer the correction will be."
If another global recession sets in, with inflation at home still over 6 per cent and identified as a major policy priority, China's central government will not have the luxury of massive spending.
"Our guess is that the government will engage in selective support of a few key sectors, for example social housing, to keep growth above 7 per cent, but will not engage in 2009-style broad stimulus, because debt levels are already worryingly high," said Arthur Kroeber, managing director of GK Dragonomics, a Beijing consulting firm.
Special to The Globe and Mail