China’s Economic Engine Shows Signs of Slowing

As the American economy appears to teeter on the edge of another recession, Europe struggles with a financial crisis and emerging markets like Brazil and India show new weaknesses, China might appear to be in better shape than most countries, economists say. But “better” is relative.

On the surface, economists at the International Monetary Fund and most banks are still estimating China’s growth rate to be over 9 percent this year. China continues to run very large trade surpluses. New construction starts have soared with a government campaign to provide more affordable housing.

And yet, the country’s huge manufacturing sector is starting to slow and orders are weakening, especially for exports. The real estate bubble is starting to spring leaks, even as inflation remains stubbornly high for consumers — despite a series of interest rate increases and ever-tighter limits on bank lending.

A survey of Chinese purchasing managers, just completed by HSBC and Markit Economics, shows a third consecutive month of contraction in the manufacturing sector. The release of the survey results on Thursday contributed to a global slide in stock markets that day.

Meanwhile, huge loans that Chinese banks have made to state-owned enterprises and local governments over the last three years could cause trouble if the economy does slow.

What’s more, there are further signs of trade hostilities from Washington, where the impulse is to blame China’s cheap exports, at least partly, for America’s continued high unemployment. On Thursday, a bipartisan group of senators announced that they would pursue legislation requiring the Obama administration to confront China more directly on currency policy. They want the White House to push harder for China to allow its currency, the renminbi, to appreciate.

If China does allow its currency to rise more quickly and if its trade surplus narrows, that could help economies elsewhere. But because China’s mighty growth engine has been one of the few drivers of the global economy since the financial crisis of 2008, signs of deceleration could add to worries about the global outlook.

Chinese exporters are particularly worried. Nicole Huang, the sales manager at Dongguan Lianyi Sport Goods Co. Ltd., a maker of beer coolers, diving suits and other products in the industrial hub city of Dongguan, said the number of orders had dropped 5 percent so far this year, and the average size of each order had also begun to shrink.

And instead of the labor shortages that plagued many manufacturers last year as workers sought better jobs elsewhere, more people now seem willing to accept assembly-line tedium. Short term, that could help exporters. But it could be an early sign of looming unemployment problems.

“At least it is easier now for us to hire workers who come into our factory looking for work, after seeing our job notices posted outside,” Mr. Huang said. “Before, no one would respond to these notices.”

The sentiments of investors and economists inside and outside China have taken a bearish turn in recent weeks. As global stock markets have tumbled, the Shanghai A-share stock market has fallen 14.7 percent since July 15. That includes a further decline of 0.4 percent on Friday.

The most worried economists are those who follow China’s often turbulent monetary policy. The central bank oversaw a huge stimulus effort in 2009 and 2010 in response to the global economic slowdown, rapidly expanding its issuance of money and then encouraging banks to lend and relend it. Broadly measured, the money supply surged 53 percent in two years.

The extra cash has sent inflation at the consumer level surging to more than 6 percent even by official measures, which tend to understate true inflation for methodological reasons. With inflation now running at more than twice the regulated interest rate paid by banks for deposits, millions of Chinese have been betting their savings on real estate. That frenzy had been sending property prices through the roof, at least until the last couple of months.

But this year, to fight inflation, the Chinese financial authorities have veered in the other direction, setting strict administrative quotas on new loans. And they have ordered the mostly state-owned banks to park more than a fifth of their assets at the central bank, which further limits the banks’ ability to lend — and businesses’ ability to borrow.

Hilda Wang contributed reporting.

Article source: http://www.nytimes.com/2011/09/24/business/global/chinas-economic-engine-shows-signs-of-slowing.html?partner=rss&emc=rss