China pauses for breath

Amid fallout from the global crisis, the world cannot rely on China continuing its hectic growth rate of recent years. Clifford Coonan reports

In a time of global crisis, China was supposed to save the world. As a huge consumer of the world's natural resources, and a key market for goods and services from Britain and the rest of the developed world, continued high levels of growth in China were vital. Any serious slowdown could cause a nightmare chain reaction around the world, it was assumed.

Then last week the government statistics office in Beijing dropped a bombshell. The rate of annual gross domestic product growth had slowed in the third quarter to 9 per cent, down from 10.1 per cent in the second quarter and 10.6 per cent in the first. Even the double-digit numbers from the earlier periods had represented a slowdown from last year, when Beijing racked up growth of 11.9 per cent.

The country's National Bureau of Statistics blamed the global financial crisis for this lowest growth rate in five years. Yesterday, in an attempt to support growth, the Chinese central bank made its third interest-rate cut in six weeks, taking its benchmark rate down 0.27 percentage points to 6.66 per cent.

The sight of hundreds of workers rallying at government buildings in the southern Chinese factory town of Dongguan this month, to demand unpaid wages after a toymaker closed with the cost of 7,000 jobs, was a sobering one.

White-collar workers at Chinese branches of many multinational companies are also facingreduced salaries as their head offices cut back on expenses, although there have been few job cuts at the Chinese armsof multinational companies – so far.

Gordon Chang, author of the 2001 book The Coming Collapse of China, has long argued that non-performing loans pose a huge threat to stability and that China's accession to the World Trade Organisation could leave the economy vulnerable. In Forbes Magazine he said that the by-products of economic growth in China, including unfunded social welfare obligations, a degraded environment and rampant corruption, may pose a serious threat as that growth falters: "When that happens, much of what we think we know about the Chinese economy – and China itself – could become obsolete."

China's export growth rate is expected to fall to 10 per cent next year, from 22 per cent this year, which will affect regions like the Pearl River Delta, which accounts for over one-fifth of China's GDP and produces over 36 per cent of its exports.

Recent weeks have seen the shutters come down at 10,000 factories in this area, as the demand for the toys and knick-knacks that have been the foundation of the country's export boom dries up in Europe and the US.

The local government has been forced to intervene, setting up funds to pay wages to workers, many of whom belong to a generation that has never experienced a downturn.

While an upswing is expected for the second half, Chinese companies, are voicing fears of a sharper-than-expected slowdown. They speak of liquidity pressures, and of falling demand for commodities such as coal and copper.

Until very recently, the iron ore dug out of the ground in Western Australia and exported to China was used in building every month a city the size of Brisbane, with two million people. A serious slowdown in China, the world's biggest consumer of iron ore, would severely impact Australia, the largest exporter of iron ore in the world.

Much has been written about the thousands of cranes dotting China's emergent cityscapes, but now it looks like demand for cement is seizing up.

It is not that long since scrap metal fetched huge prices, and the authorities were fretting about the number of manhole covers being stolen to be sold on as scrap. But private-sector building, especially apartments and offices, has effectively stopped, with the only building going on in state-sponsored infrastructure. And multinationals buying up assets at a fast rate in China have been told to ease up until the credit crunch is over. All of this downbeat news feeds into a growing suspicion that China has for too long had its cake and eaten it, and that there is simply no precedent for a country growing and growing without pause. A hangover has been on the cards and the Olympics, while meaningless economically, are widely considered the psychological trigger for China to face a slowdown.

Vivek Tulpule, economist with the global miner Rio Tinto, cut his outlook for economic growth next year in China and sees no bounce back in the prices of commodity prices until next year, after Beijing's moves to ease credit constraints kick in.

Despite all this gloom, however, it's premature to write China off. Chinese banks did not issue sub-prime loans, as a rule, the country's $1.9 trillion (£1.2trn) in hard-currency reserves is a useful war chest to call on in a downturn, and the renminbi currency is stable. All of this gives China flexibility to fend off the impact of the global financial crisis.

According to Wang Tao, UBS China economist, the third-quarter slowdown in GDP growth to 9 per cent was "in line with the UBS forecast and affected by the Olympics-related activity restrictions. We expect growth to slow further in the coming quarters, as export growth and related manufacturing investment slows significantly."

China's economy has grown by nearly 10 per cent a year on average every year since Deng Xiaoping came to power in 1978, and there has long been a feeling that when the economy comes in to land, it will land hard.

However, Wang ultimately remains positive on the outlook for China. "The government has outlined a set of policy-easing measures to help keep growth strong, but a significant easing of credit has not been decided. We think thegovernment has sufficient time and resources (including credit easing) to stimulate domestic demand, and reaffirm our growth forecast of 9.6 per cent for 2008 and 8 per cent for 2009," she said.

Premier Wen Jiabao has also been making soothing noises. Weakening external demand was hurting theeconomy, he said, but added that his government was confident it could keep growth steady. Seeking to shore up sentiment, central bank governor Zhou Xiaochuan this week said the fundamentals of the Chinese economy remain sound and, while cautious, said the country can cope with the challenges posed by the global financial crisis.

"We must not underestimate the impact on China's economy," he told the Standing Committee of the Chinese parliament, the NPC.

"We should recognise that the overall economic condition is good, our financial institutions are generally strong with increased profit-making and risk-fending abilities, market liquidity on the whole is ample and our financial system is sound and safe," he said.

China's cabinet, the State Council, is boosting its spending on infrastructure, offering tax rebates for exporters and allowing the state-controlled prices for agricultural products to rise. There have also been measures to kick-start the property market to avoid house prices falling too drastically.

China is now a globalised economy, but its domestic market is still massively underexploited, and it is to this market the government will most likely turn.

But things are sure to get worse before they get better. Ultimately, China is not a big enough economy by itself to keep the global economy ticking over, accounting as it does for 5 per cent of the world economy, compared to the US with 28 per cent. The world needs to find a saviour elsewhere.