How China copes with the global recession will be interesting to watch. I suspect the landing will be hard with domestic consumers in no position to take up the slack. The pain will really kick in if property prices start falling rapidly. Then we might see a banking crisis and under performing loans that will have knock on effects across the country.
In a series of articles the FT focus on doing business in China and I will be highlighting different topics this week.
To begin with the FT today signals the beginning of the sharp slowdown although those on the street have been aware of these events for some time.
Indicators hint China on verge of slowdown [FT]
China will indicate on Monday whether its economy faces a hard landing when third-quarter gross domestic product figures are announced.
After a bumper 2007, which saw GDP expand nearly 12 per cent, growth in China has been slowing and fell to 10.1 per cent in the second quarter.
Producing steel at a mill in Baotou, China. Steel prices have fallen 20 per cent over the past three months and there are reports of steelmakers closing because of falling demand
Economists expect the economy to have experienced a further slowdown in the third quarter, with growth down to 9.7 per cent.
However, other indicators, from steel prices to housing sales, have suggested that the Chinese economy could be on the verge of a much sharper slump, which would weaken demand for commodities and undermine global growth prospects.
The barrage of negative indicators has increased pressure on the authorities to introduce a fiscal stimulus package and measures to support the property market.
The government has cut interest rates twice in the past month. Senior officials said last week that other steps were being planned.
“The State Council is studying a series of measures and is ready to announce them, as the downward trend has already caught the government’s attention,” said Du Ying, deputy director of the National Development and Reform Commission, the main economic planning agency.
Although the headline figures for the third quarter are expected to show continued strong growth, several economists have sharply cut forecasts for next year.
Ha Jiming, chief economist at China International Capital Corporation in Beijing, predicts that growth will fall to 7.3 per cent if there is not a substantial fiscal stimulus.
The more pessimistic mood has been prompted by a sharp slowdown in the property market, which is beginning to have a knock-on effect on other industries.
Steel prices in China have fallen about 20 per cent over the past three months and there are reports of small steelmakers being forced to close because of shrinking demand.
Yuan Gangming, economist at Tsinghua University in Beijing, said at the weekend that the relatively tight fiscal policies adopted this year to control inflation were no longer needed. “Many people in China are concerned about the financial crisis but the real problem we face is the slowdown in our domestic economy,” he said.
However, some members of the government believe that fiscal stimulus would be premature, as the economy is still growing at nearly 10 per cent.
Moreover, some leading economists are urging the government not to take rash measures that would boost the economy in the short-term. Yu Yongding at the Chinese Academy of Social Sciences said the government should continue to let the currency appreciate.
“The original intention of renminbi reform was to promote the structural transformation of China’s economy to reduce over-dependence on exports,” he said in a recent magazine article.
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