Fragile China

Over the past decade, the idea of a “Chinese slowdown” has come to seem like an oxymoron. The data on manufacturing activity, which Beijing released on Thursday, show this is no longer the case. The official purchasing managers’ index fell to 49 in November. For the first time since February 2009, the sector is experiencing a decline and the future looks no brighter. Economists at UBS expect year-on-year GDP growth to drop to 7.7 per cent at the start of next year, a sharp decline on this year’s expected 9.3 per cent.

The reason is partly domestic. Although construction has held up, property sales have dropped sharply and developers are delaying new projects. This means that the construction boom may be near its end.

Just as important, however, is the crisis in the eurozone. Beijing’s growth model is still largely export-led and its main trade partner is the European Union. For all the talk of an Asian decoupling, the Chinese and European economies remain closely intertwined.

To address the downturn, the government has loosened its monetary policy. The reserve ratio was cut by 0.5 percentage points. This meant injecting Rmb400bn ($63bn) into the banking system, in the hope that credit would trickle down to lenders. This is unlikely to have a dramatic effect and is anyway misdirected. The money most likely will not reach the smaller enterprises upon which a recovery must depend.

The worry is that the slowdown may encourage Beijing to go for another stimulus package similar to the one in 2009 and to abandon its intention to let the renminbi appreciate, in the hope of protecting domestic exporters.

Both measures would be counterproductive. A new stimulus would reinflate real estate prices, which Beijing is rightly trying to bring under control. It might also spark fresh consumer price inflation. With food prices rising by 12 per cent a year, this is a real worry. Moreover, holding the renminbi down would simply put more pressure on already struggling economies in Europe and the US, undermining their flagging ability to absorb Chinese goods.

A better way forward would be for Beijing to find non-monetary ways of fostering domestic consumption. That means continuing to let the renminbi appreciate, while directing any fiscal stimulus in the direction of households.

A switch to a new growth model would clearly benefit the world economy. But it would be in China’s interests, too.

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