As global economy slows, Chinese factory shifts sights from Europe to home

“There is a general consensus in the government that the stimulus response to the crisis in 2008 was excessive,” says Mr. Batson. “They won’t do it again.”

A commentary published on Wednesday by the state news agency Xinhua made the same point. “Many have expected the government to announce an aggressive plan … to keep the economy from stalling a second time,” the article said. “However, a massive stimulus plan is not only unlikely, but would be detrimental to the country’s sustainable growth.”

Not that the authorities have been sitting idly by as the Chinese economy has tanked. The central bank has reduced interest rates twice this summer, and encouraged banks to lend by cutting their reserve requirements three times in the past year. The government has tinkered with tax and other measures to make life easier for exporters.

“But what has surprised people this year is that the government seems quite serious about not riding to the rescue” in the way it did four years ago, says Batson.

“In 2008, the central government was very determined to promote investment, but now the thinking has changed and they do not want to move so fast,” agrees Ye Tan, an independent economic commentator.

(Last week’s government announcement of $150 billion worth of infrastructure projects appeared to some analysts as a mini-stimulus plan; on closer inspection it was clear the projects had been approved over the past five months, and were just being announced as a package.)

The authorities’ desire to see investment growth cool could be a first step toward the long-awaited rebalancing of the Chinese economy that US Treasury Secretary Timothy Geithner has been pleading for.

China’s growth has long been driven by exports and fixed asset investment; it would be more sustainable if it depended more on domestic consumption and foreign governments would be happier too because if Chinese consumers were buying more it would be easier to sell them foreign goods.

Kaiyee shows the way

The Kaiyee factory is showing the way that the Chinese authorities say they want to go – targeting their sales at local consumers. But it is hard to see this becoming a general pattern very soon.

Rebalancing will happen only when investment grows more slowly than GDP and consumption grows more quickly. “But that will not happen in the near future,” says Ms. Ye, because it will require household incomes to rise as a share of GDP and that is not happening.

If investment growth and export growth slow down, while consumption does not pick up speed, the inevitable result will be slower overall economic growth than China has grown accustomed to.

The government has set a target of 7.5 percent for this year, and most analysts predict the economy will meet that goal. But China needs to add 24 million jobs a year to its economy to absorb its school and college graduates, and growth of much less than 7 percent would not create them.

A shortfall, and significant youth unemployment, could pose serious social problems for China’s next government, due to take over by the end of this year.

But for the time being, says Batson, “the government is cushioning things but it is not trying to push up demand and guarantee instant growth; that’s a big change.”

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