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Police officers in Hangzhou maintain order after a model of a new housing estate was smashed by property owners upset that the asking price of new homes in the complex had been cut dramatically, making their own homes worth a lot less.

Lang Lang/Reuters/Lang Lang/Reuters

On a side street that leads into the Green Lake Place housing compound, just off a massive highway that circles Beijing's sprawling core, a group of young men is facing a new problem in the city's once red-hot real estate market: a tough sell.

As China's economy slows, home sales stagnate and owners find themselves suddenly in need of cash, the number of agents brandishing placards on the streets below this complex has burgeoned in recent months. They're busily trying to fill high-end apartments that once flew off the market, snapped up by foreigners and middle- to upper-class Chinese looking for a home near one of Beijing's largest parks, with easy highway access for commuters.

"These days, some are emergency rents, people are needed to move in quickly, so rent is a bit lower, maybe ¥1,000 ($160) less per month," said Li Zhipeng, 22, a starry-eyed agent who arrived in Beijing a few months ago from Inner Mongolia, holding a placard advertising 120- to 140-square-metre apartment rentals for ¥10,000 to ¥12,000 a month. "It's not because there's anything wrong with the apartment, it's only because some owners suddenly need some cash, for going abroad or to pay a loan on the house."

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The dropping price of real estate is just one of many signs that difficult times lie ahead as China begins Lunar New Year celebrations on Sunday night. While the upcoming Year of the Dragon stands as an auspicious symbol of power and good fortune, China finds itself at a critical juncture as it stares down slowing growth, shaky trade numbers and an important change in political leadership. Taken together, the country's ability to cope with these challenges, among others, represents a massive challenge to Beijing's policy makers and the fractured global economy.

In some ways, China's year of transition is one of its own making. The property market that has fuelled so much of gross domestic product growth – in part because of free and easy bank lending that drew in speculators – is deflating fast, under tough government restrictions that limit who can own property, where, and how much they have to pay for it, plunging developers into debt.

But this planned slowdown has created some alarm as looming recession in Europe and stagnation in the United States mean China's export industry – the other engine of its growth – is also slowing. As exports drop off, so will China's appetite for commodities and other raw materials used in production, creating a domino effect on its suppliers abroad.

Policy makers have so far managed to balance on a tightrope between slowing inflation to 4.1 per cent – after peaking at a three-year high of 6.5 per cent in July – and managing GDP growth, ending the fourth quarter at 8.9 per cent.

The question now is whether policy tinkering will be enough for China's leaders to effectively manage their way through external and internal crises, including a glut of outstanding bank loans stemming from 2008's ¥4-trillion stimulus package, many of which may never be repaid.

"The crunch time is going to begin this spring; there's a lot of debt that needs to be rolled over and it's going to crowd out new investment," warned Patrick Chovanec, a professor in the School of Economics and Management at Tsinghua University. "These choices are not going to come on their timetable. They are going to face some very tough choices."

This year will also see a leadership change. This fall, President Hu Jintao is widely expected to be succeeded by his vice-president, Xi Jinping. That process is so carefully planned that it is highly unlikely that outsiders will be able to perceive any change in policy. But it also makes stability all the more important this year.

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"This year will be a year of treading water to prepare the economy for upcoming changes," said Alaistair Chan, an Asia economist for Moody's Analytics based in Sydney, who cited China's aging population, rising wages, bad loans and the property slowdown as just some of the major challenges still ahead for Chinese policy makers. "The biggest challenge will be in the coming years, up to 2015, with the leadership change. … [Growth]is going to slow dramatically in coming years."

Beyond external forces, at issue is also the maturing of China's economy, which is beginning to shed its status of cheap exporter to the world.

The minimum wage rose an average of 22 per cent last year. Factories, shops and restaurants in major centres as well as China's coastal cities are now seeing labour shortages. And for the first time, at the end of last year, China's urban population outnumbered its rural population, with 690.79 million urban residents and 656.56 rural residents. That means higher incomes and purchasing power and greater government responsibility to build infrastructure. It is also thought to contribute to China's traditionally high personal savings rates, since these former rural dwellers do not hold permanent resident rights, or a hukou, in their new cities and must sock away savings to pay for their own health care and retirement.

"I think people have emphasized really too much about fundamentals, and have not paid enough attention to short-term shocks, such as rising living costs that are driving people out of coastal cities and bigger cities," said Wang Yijiang, an economics professor at Cheung Kong Graduate School of Business, who warns the rising cost of living and the sheer demographics of an aging population make further market reform all the more essential. But global financial storms have distracted from that process, he warned.

Still, when set against other economies around the world, China's numbers are hardly the most troubling. The World Bank still forecasts an overall GDP growth rate of 8.4 per cent for 2012.

"China has a high savings rate so it has enough resources to continue investment," Justin Yifu Lin, the World Bank's chief economist, said during a briefing in Beijing this week, countering warnings from other economists that China's state-driven investment boom needs to be replaced by domestic consumption for long-term growth. "Right now the United States and Europe face the problem of overconsumption. So China, a developing country, needs to learn lessons from those countries," Mr. Lin said. "If China continues to make investment, it will be good news for the world … because it will continue to import goods."

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Special to The Globe and Mail



Import growth in December, down from the previous month's 22.1 per cent.


Export growth for all of last year, slowing dramatically from growth of 31.3 per cent in 2010.


Consecutive quarters China's GDP growth has slowed. Last year's 9.2 per cent matched the slowest pace since 2002. Most forecasts put this year's expansion at between just 8 per cent and 8.5 per cent.


Months in a row China's manufacturing activity contracted, including January.

52 of 70

Chinese cities that saw home prices fall in December, according to government data released Jan. 18.

Sources: Wires, staff

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