China Shows Signs of Slowing

After years of hyper growth, averaging close to 10% a year, the great engine of growth that is China, is faltering. A series of government reports released over the last few weeks indicated that China’s exports are moderating. Real estate construction projects are being suspended. Consumer confidence is in decline. And many factories in southern China are closing, putting tens of thousands of migrant laborers out of work. Another sign, orders for Christmas from the Western nations, were down 20 percent this year. Big retailers and toy marketers are gloomy about the upcoming holiday season sales.

Newly released data suggests that nearly every sector of the economy is slowing and credit is tightening. While few economists expect China to fall into recession, analysts are forecasting the worst growth in more than a decade, with the economy expected to expand by as little as 5.8 percent in the fourth quarter this year, down from about 11 percent in 2007.

5.8 percent growth would be welcomed in any of the developed nations today; most all of the west is looking at declines in GDP for 2009. But for China, a moderation of this magnitude, spells trouble. China’s huge population is still largely rural, with hundreds of millions of farm laborers still stuck in medieval farming methods. The high growth generated over the last ten to twenty years in China has been the ticket for millions of these folk to make their way to the cities and find work in the burgeoning factories that lead China’s export industry.

A slowdown of the growth rate raises fears of political unrest within the Communist Party, so they are taking strong steps to keep the growth rate as high as possible. The government is preparing a large economic stimulus package, pushing new infrastructure projects, offering aid to exporters and searching for ways to prop up the nation’s severely depressed stock and real estate markets.

Domestically, there are also signs of a slowdown: Auto sales have plummeted this year. Air travel is in decline. Property sales have dried up, and weakness in the property market is hitting the makers of steel, cement and glass. “There is a nose dive in real estate construction in south China and east China, the two real estate boom areas,” said Yang Dongsen, a cement industry analyst at Merchant Securities. The real estate slowdown is expected to affect retail sales, which for the last few years had been lifted by new-home buyers purchasing appliances, decorations and other household goods.

It does not help that China’s stock markets have also collapsed, after a stunning rise in 2006 and 2007. Share prices in Hong Kong are down about 50 percent, and the Shanghai composite index has fallen 67 percent this year, wiping out nearly all the gains it had made in the previous two years.

These data do not necessarily spell doom for China’s growth, but they do point to a period of economic adjustment that they must navigate. The west and the east are, to a large degree, joined. They depend on us for demand for their factories, and we depend on them for supplying us with inexpensive goods. The developing markets in Latin America are, themselves, dependent on China for purchasing their raw commodities, such as iron ore and petroleum. The downturn in Europe, Latin America and America is too severe not to be felt in the China. As much as they would like to be insulated from our economic problems, the interdependence is unavoidable. It will probably be some time before China will be worried about inflation and growth that is too fast.