April 20, 2024

China’s Economy Slows, but Inflation Still Looms

Chinese manufacturers’ backlogs of orders are gradually shrinking in many industries. Purchasing managers have become less optimistic about their businesses’ prospects. And after surging past the United States in car sales over the last two years, the Chinese auto market unexpectedly stalled last month, as carmakers curtailed production plans.

Because China’s cooling economy is partly a result of Beijing’s efforts to contain inflation, some economists are not worried, saying a slight slowdown could be positive. And they say that after the government eases off the brakes, economic growth should quickly pick back up.

But other experts worry that inflation is already so entrenched that the government may be forced to continue braking the economy for a considerable time.

“They have to continue to tighten policy into what we expect will be a sharp growth downturn, already likely to be under way,” said Diana Choyleva, an economist in the Hong Kong office of Lombard Street Research, an economic forecasting firm based in London.

The world closely monitors the temperature of China’s economy, so crucial has it become to the health of global business and finance. This spring, as economists at Western investment banks have been reducing their growth forecasts for China, the specter of slackening Chinese demand has helped send world prices for industrial commodities like copper falling by 10 percent or more.

And the “A” share stock market in Shanghai has dropped 11.7 percent from its high on April 18, including drops of 0.13 percent on Monday and nearly 1 percent on Friday.

Despite signs of slowing Chinese growth, some international corporate executives say they remain optimistic, particularly if they look beyond the next several months.

“I don’t think it’s a hard landing,” said Martin Brudermüller, the vice chairman for BASF of Germany, the world’s largest chemical company, which sells to a wide range of industries in China. “I’m not really worried at this point.”

And even though Goldman Sachs on Tuesday cut its forecast for economic growth in China during the second quarter to 8 percent — down from 8.8 percent — it predicted that growth would recover to 9.3 percent by the fourth quarter.

The optimists note that the Chinese economy expanded robustly until this spring, even though policy makers had been stomping on the brakes since October to try to curb inflation. Seen from that bright-side perspective, policy makers can easily press the growth accelerator, after inflation starts to subside.

The braking measures have included the requirement that commercial banks, to restrict their ability to lend, must park more than one-fifth of their assets at the central bank. That is starving all but the largest and most politically connected companies of capital.

And trying to slow a real estate boom that looks more and more like a dangerous bubble, the government has also put many restrictions on issuing new mortgages. The measures include requiring higher down payments, to reduce the risk that a real estate collapse would harm the banking system, as happened in the United States.

Another slowdown factor: the huge government investments in high-speed rail and other infrastructure, which played a central role in China’s swift recovery in 2009 from the global economic downturn, have begun to level off.

But Douglas Hsu, the chairman and chief executive of the Far Eastern Group, a big Taiwanese multinational with extensive investments in the cement and petrochemicals industries in mainland China, predicted that government-supported efforts to increase construction of low-income housing and move more people from rural areas to cities would offset the gradual deceleration in infrastructure spending in the months and years to come.

The big question now is how much economic growth may slow, before the authorities shift their priority from controlling inflation to revving the growth engine.

Some businesses here in Changsha, a city of 6.5 million people that is the capital of Hunan province in south-central China, say they already see weakening sales.

“Our business is down 30 to 40 percent, we’re losing money every day,” said Li Chuanlian, the manager of a store that sells stoves and water heaters.

Article source: http://feeds.nytimes.com/click.phdo?i=bcfa9d7a578e914929b3c01a34087317

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