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Global trade gloom makes China uneasy in year of leadership transition

A man counts money in front of a truck loaded with carrots at a wholesale market in Fuyang in central China's Anhui province.


With the World Bank warning that the global economy is entering a "dangerous period" as Europe's financial turmoil spreads, even China's growth engine feeling the pressure of higher borrowing costs, falling stock markets and inflation.

China's gross domestic product growth fell to 8.9 per cent in the last quarter of 2011 – a 10-quarter low – and 9.2 per cent for the year. Economists warned that number would worsen this year as global pressures meet China's efforts to contain inflation and rein in bank lending.

Limited monetary easing and an increase in retail spending in the last quarter redeemed 2011's number somewhat but growth is expected to fall to 8 per cent or below for at least the first quarter of 2012. That figure is considered critical for continued job creation in a country where authoritarian leaders fear social unrest.

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"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," said Justin Yifu Lin, chief economist for the World Bank, in a news release issued ahead of a press conference Wednesday morning in Beijing. The bank now expects the global economy to expand 2.5 per cent in 2012, and 3.1 per cent in 2013. High-income country growth is expected to sink to 1.4 per cent, with the euro-zone countries in recession.

China's growth is expected to remain at a comparatively healthy 8.4 per cent this year, the World Bank said. But developing countries in general will have less room for stimulus spending than in the 2008 financial crisis, it warns, and must now prioritize spending on social safety nets and infrastructure, prepare for budget deficits, and stress test domestic banks.

The head of China's statistics bureau, Ma Jiantang, on Tuesday described the global trade environment as "gloomy, highly complicated and severe."

The trade gloom is all the more alarming for Chinese leaders because this is a leadership transition year: President Hu Jintao and Prime Minister Wen Jiabao will followed by anointed successors next fall. This makes economic stability all the more important for policy makers: Keeping inflation down, maintaining moderate growth, and making as few dramatic decisions as possible.

"They will want to keep things as stable as possible and also keep policy as stable as possible," said Brian Jackson at the Royal Bank of Canada in Hong Kong. He predicts government will make further cuts to banks' reserve requirements to free up lending, but no other immediate changes.

Chinese retail sales were up 18.1 per cent, year over year, in December, an increase over November's 17.3 per cent. December's figures were boosted by the nearing end of a government rebate on replacing household appliances as well as buying ahead of the Chinese New Year.

Industrial production was up slightly from November, rising 12.8 per cent over November's 12.4 per cent. Fixed-asset investment eased to 23.8 per cent in December, from 24.5 per cent in November.

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"These figures confirm our ... view that China is basically undergoing a substantial, but nonetheless cyclical, economic slowdown. Thanks to the big stimulus delivered from late 2008 through 2010, the country has not seen a cyclical slowdown in some time, and most people may not remember what one looks like," wrote researchers at GaveKal-Dragonomics, in a note to clients.

"This may be why stories about how China is now entering terminal economic decline have become so popular. But most economic indicators do not support this scenario, and we are still comfortable with our call for GDP growth of around 8 per cent this year."

Tough new restrictions on the property market, intended to assist legitimate first-time buyers by keeping speculators out of the market, are also contributing to China's slowdown by limiting who can buy property and how often, as well as requiring sizable down payments from buyers. That sinking market, along with tightened bank lending, which has also hit small- and medium-sized entrepreneurs, means increasing amounts of credit are financing old loans, rather than new investment.

"The numbers we're getting are very fragile, more fragile than they appear because they are being driven by an investment boom, and there are several questions about whether that investment can be sustained in the new year," said Patrick Chovanec, an associate professor in Tsinghua University's School of Economics and Management. "This investment boom is coming to an end because it can't be funded any more under the current system."

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