Chinese growth is on a downward path. Gross domestic product increased 11.9% in the first quarter last year, and the rate of increase has declined every quarter since. In the first three months of this year, growth came in at 9.7%.
Current GDP growth is now below the 9.9% average for the three decades of the reform era. Conditions at the moment resemble those that preceded the downturn of the later part of the 1990s when, in reality, the country tipped into a year or so of contraction.
So will the economy continue to trend lower? There are some signs it will not. In April, for instance, the country earned an $11.4 billion trade surplus as the result of a spectacular 29.9% increase in exports. Sales abroad reached a staggering $155.7 billion, a monthly record.
Exports, of course, cannot continue this pace. The country suffered a trade deficit of $1.02 billion in the first three months of the year—the first quarterly deficit since 2004—and Beijing’s Commerce Ministry even hinted last month that the country will post a deficit for the entire year. That’s unlikely, however, and sales abroad should boost overall growth for the rest of 2011.
The non-export economy, however, looks like it has reached a plateau. Factory output was up 13.4% in April, but the increase was less than March’s and well below forecasts. Similarly, PMI, as calculated by the China Federation of Logistics and Purchasing, was 52.9% last month, still positive but down from March. Surprisingly, new orders are falling this month, and this indicates a sudden deterioration in business conditions. All eyes will be on HSBC’s PMI, to be released tomorrow.
Consumer sentiment is also beginning to turn. Vehicles sales, now viewed as a crucial indicator, fell 0.25% in April, hit by softness in the commercial market. Car deliveries to dealers increased last month, but only by a puny 2.8%. Most analysts think the era of double-digit increases for vehicle sales is over.
And then there is the closely-watched housing market. Prices are still going up—especially in the inland cities—but in April the transaction value of homes fell 21.3 % across the country as compared to the preceding month. Some brokers are exiting the business, and there are now stories of hidden discounts offered to purchasers. The next act is for prices to begin to fall.
Softness in vehicle sales and the property market are, in a real sense, victories for government planners. After all, Premier Wen Jiabao has repeatedly said that lowering growth is a top priority. Therefore, the central government has eliminated subsidies for car sales and has been trying to moderate home prices in crucial coastal markets.
As Beijing does so, Mr. Wen is eliminating what has become known as the “Four Uns,” after his memorable 2007 line that the Chinese economy, due to runaway growth, had become “unstable, unbalanced, uncoordinated, and unsustainable.” He gave up his efforts to stabilize, balance, coordinate, and sustain the economy in the following year when he tried to avoid the ill effects of the global downturn with what is perhaps the biggest stimulus program in history. After successfully creating growth—in 2009 the premier essentially added $1.1 trillion of stimulus into China’s then-$4.3 trillion economy—he has had to work overtime to repair the damage caused by his cure.
And that gets us to his present problem. Premier Wen is trying to cool growth to fight inflation. In April, consumer prices fell, but only by 0.1% from March. If it were not for his informal controls, prices increases would have undoubtedly continued to accelerate. Soon, those price controls will lose their effectiveness—they’re already beginning to fail—and the premier could then face the worst possible world—low growth with high inflation.
Up to now, Mr. Wen has been trying to fine tune a volatile economy. He has wanted to avoid the contraction that his predecessor, Zhu Rongji, created when he tried to bring inflation under control in the mid-1990s. So far, the current premier is moderating growth but doing little to tame price increases.
Some argue that, if growth falls too fast, Mr. Wen can always create GDP by just spending more cash on another “ghost city” or cross-country toll road. Yet today, unlike 2009, he has to worry about fueling a property boom and stoking inflation. So there are now real constraints on what he can do as he tries to perform the present-day equivalent of a Biblical miracle, engineering a soft landing of a fast-moving economy.
Gordon G. Chang is the author of The Coming Collapse of China, and is a columnist at Forbes.com
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