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Why China's economy may be heading for a hard landing

Business confidence has sunk for the third quarter in a row as a growing number of indicators suggest China's economy is slowing.

By Staff writer / May 17, 2012

This April 27 photo shows a worker at a steelmaker in Zhangjiagang in east China's Jiangsu Province. China's economic growth has abruptly decelerated from overheated to slower than Beijing wanted in just half a year as export demand and consumer spending at home weaken, raising the threat of job losses and possible unrest.

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Beijing

An alarming batch of economic indicators from China in the past 10 days has cast a pall over the country’s economic growth prospects, rekindling debate about whether one of the few bright spots in the world economy may be heading for a hard landing.

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And the government’s initial efforts to pull out of the dive suggest that it may be putting off – once again – long promised policies to rebalance the Chinese economy by relying more on consumption than on its traditional growth drivers, exports and investment. 

Industrial production grew by only 9.3 percent in April, year on year, its slowest rate since the financial crisis. “That is a real and serious problem,” says Xiang Songzuo, chief economist for the giant China Agricultural Bank.

Equally worrying, he says, is that bank lending is stagnant, and not just because of the government’s yearlong policy to dampen inflation by curbing loans. “The real demand for bank lending has been slowing down quite obviously,” Mr. Xiang says.

That nervousness was reflected in a survey published recently by the Central Bank showing business confidence in the economy sinking for the third quarter in a row to 39.2 percent, well below the 50 percent mark dividing optimism from pessimism.

That, warns Xiang, means that there will be “no very obvious or significant impact” from the government's move last week to cut banks’ reserve requirement ratio. That reduced the amount of money banks must hold in reserve against bad loans, thus freeing up more money for them to lend.

What happened?

For more than two decades China has been enjoying gross domestic product growth rates of more than 10 percent a year, driven mainly by exports and investment at home.

But Beijing’s massive trade surpluses angered its trading partners, and many state-funded investments, especially in infrastructure such as roads, airports, and industrial development zones, have not turned out to be very profitable.

That has especially been the case with projects launched helter-skelter in 2009 and 2010 as part of the $600 billion stimulus package that the government used to escape the worst of the 2008 financial crisis.

The authorities pumped so much money into the economy that it began to overheat, sparking inflation above 5 percent a year, so last year the government curbed lending sharply, forbidding local governments to take out more loans.

“The reason for this turn in the business cycle is the government’s determination to end the stimulus policy and bring down inflation,” says Andrew Batson, an analyst with the Beijing-based Dragonomics consultancy.

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