The Debate

Where China Slows, Others Follow

China’s economic growth seems to be slowing. Can its leaders revive the economy and help others in the region?

As James Pach noted in our Week in Asia news round up at the start of last month, the past few weeks were set to be critical for China, according to local economists. “Can Beijing ease a slowdown that many fret is too rapid? A strong official PMI (Purchasing Managers’ Index) this week offered some cause for hope, but an early estimate of GDP growth for the first quarter of 2012 (8.4 percent) suggests the economy is at its lowest ebb since the dark days of early 2009,” Pach wrote.

So, how do things stand today? A month ago, Chinese Premier Wen Jiabao said he was confident in the country’s “steady and robust” economic growth. But according to IHS Global Insight’s China analyst, Alistair Thornton, the economy is neither stable nor robust.

“There are credit problems on both the demand and supply side, and the People’s Bank of China is adapting to its new place in the economy now that capital inflows have dried up. Thornton says that things should improve in the second half, but he adds that it’s going to be a “very ugly, very volatile recovery. And, the risk is on the downside.”

Thornton also sent me a copy of IHS’s latest China report, and it makes for sobering reading. The report notes that growth seemed to stall in April, and that although an 8 percent GDP growth rate is likely for this year, that “there are worrying constraints on the ability of the government to stimulate the economy, providing significant downside risk. Deposit flight is a real concern, as is evidence that loan demand is weakening.”

This comes a couple of days after China said it would undertake measures to boost demand and investment as fears grow over the apparent slowdown.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

“Downward pressure on the economy is increasing,” the government said in a statement issued after a cabinet meeting led by Wen, the BBC reported. “We must proactively take policies and measures to expand demand and to create a favorable policy environment for stable and relatively fast economic growth.”

In response to these concerns, officials have indicated they intend to ramp up investment in the country’s energy sector, an announcement that followed a plan floated to allow private investment into the vast but heavily indebted railway sector.

“The government has pledged to publish detailed guidelines to encourage private investment in key state-controlled sectors, but how quickly they will be implemented remain in question given the stiff resistance of state-owned giants,” Reuters noted.

According to the World Bank, a slowing China is set to drag down East Asia, and the organization this week lowered its forecast for growth in the region, encouraging leaders to look to look domestically for growth, rather than depending on exports. The Bank forecast that growth in East Asia would fall to 7.6 percent from 8.2 percent last year.

And this of course has implications for the U.S. economy in an election year.

As John Grgurich wrote in Daily Finance last week, Like it or not, the U.S. is inextricably linked to China's success, failure, or stagnation…(But) it’s an uneasy relationship, at best.”