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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.

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“Cycles in the Chinese economy over the past four or five years have been very much policy driven,” Mr. Batson adds. “I don’t think a month or two of bad economic data means the government has lost its ability to manage things.”

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‘A tricky balancing act’

Officials here have been pledging for some time that they will seek to rebalance the Chinese economy, making it less reliant on exports and investment, and more dependent on domestic consumption. That would please US and European governments, anxious to export more of their own goods to Chinese consumers.

But making that transition is “a tricky balancing act,” says Batson. Domestic consumption is less easy to goose than investment spending, which can be ordered by government fiat.

If cuts in investment meant a serious economic slowdown before domestic consumption picked up significantly “there is a question whether they would be politically feasible,” says Victor Shih, who teaches Chinese politics at Northwestern University in Evanston, Il.

Echoes of eurozone crisis?

Now there are fears that the crisis in the eurozone, China’s biggest trade partner, will slow Chinese sales there. Exports to the European Union fell in April by 2.4 percent from the year before, dragging overall year on year export growth to only 4.9 percent.

If domestic Chinese consumption does not grow quickly enough to take up the slack – and there are no signs yet that it will do so – the government is likely to fall back on investment to boost economic growth, says Huang Weiping, an economics professor at Renmin University in Beijing.

Premier Wen Jiabao has the bullets,” says Professor Huang. “He can use central government money to stimulate the growth rate. If we want a normal growth rate we have to depend on investment, and especially on government investment.”

Though that “would be the worst thing they could do, reinforcing the imbalance and their reliance on investment,” argues Patrick Chovanec, who teaches economics at Beijing’s Tsinghua University, “nobody wants to interfere with growth, even temporarily.”

The government has forecast 7.5 percent GDP growth this year, in a bid to lower public expectations after decades of double-digit growth. “People took that for granted, but it was actually extraordinary,” says Batson. “We should not be surprised to see it come down.”

“Chinese people must face reality; we cannot sustain such high growth rates,” agrees Xiang. “We must accept 8 percent a year, or even lower.”


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