China Economic Growth Is Slowest in Decades
Jan 20, 2015
China’s economic growth slowed to 7.4% in 2014, downshifting to a level not seen in a quarter century and firmly marking the end of a high-growth heyday that buoyed global demand for everything from iron ore to designer handbags.
The slipping momentum in China, which reported economic growth of 7.7% in 2013, has reverberated around the world, sending prices for commodities tumbling and weakening an already soft global economy.
China’s economy grew 7.3% in the fourth quarter from a year earlier, the National Bureau of Statistics said, buttressed by targeted moves to ease borrowing. But it continued to face a housing glut, soaring debt and overcapacity in many industries, factors likely to erode growth in 2015.
Beijing had said it expected “about” 7.5% growth in 2014. The chief of the statistics bureau said Tuesday the rate was within that range.
Chinese stocks rose on the news, a day after their largest one-day drop in more than six years following a crackdown on margin trading.
While 7% growth would be the envy of most economies, Beijing says at least this level is needed to create enough jobs for China’s huge population. The Communist Party sees social stability as an essential component in maintaining its grip on power.
The results follow decades of growth that has hovered around 10%, one of the broadest, most rapid economic ascents in history that helped raise Chinese living standards and propel global growth and trade to new heights. Slipping economic momentum in China has had far-flung implications, squeezing Australian government budgets and Chilean copper mines that grew increasingly dependent on China’s ascent.
The slowdown comes at a vulnerable time for the world economy. The eurozone is at risk of a third recession in six years. Abenomics policies have failed to lift Japan out of stagnation.
And output in many major emerging markets—that provided most of the impetus for global growth over the past decade—is slowing faster than expected. The U.S. economy remains the one global bright spot, but it will struggle to make up for growing weakness elsewhere.
Economists see the slowdown of 2014 as the prelude to an extended deceleration of growth. The often bullish International Monetary Fund on Monday forecast 6.8% growth for China in 2015, a number below the 7.0% target economists expect Beijing to set.
“The housing slowdown is more serious than we thought earlier,” said IMF chief economist Olivier Blanchard in an interview.
Others are even more downbeat. Oxford Economics predicts 6.5% and says it expects this year will be the last time China’s growth exceeds 6%.
Leaders since mid-2014 have emphasized a “new normal” of slower growth. As the government tries to manage expectations, Premier Li Keqiang signaled Monday the economy would continue to face downward pressure this year.
How China addresses the slowdown matters to the leadership’s goal of restructuring the economy so it is powered by domestic consumption and service industries. Reliance on real estate, construction and smokestack industries has reached its limits, as evidenced by rising debt and polluted skies over much of the country.
Now President Xi Jinping and other leaders find themselves with constricted options to shore up the economy as they seek to avoid the missteps of large economic stimulus after the 2008 global financial crisis. Then, the leadership opened the credit taps to cushion a falloff in foreign demand and investment.
Now, the problems are at home, and many are hangovers from the earlier binge, as are a plethora of white-elephant projects, such as nearly empty malls, ghost cities and bridges to nowhere.
“This time around, they’re not giving money away,” said ING economist Tim Condon. “They don’t want to do that again.”
“Sure, they’d like to regain economic momentum,” said Royal Bank of Scotland economist Louis Kuijs. “But at the moment I don’t think anyone expects that.”
It is getting harder for the government to target credit to specific sectors, such as agriculture, and transportation, as banks balk at adding more nonperforming loans and borrowers hesitate.
LD Forge, a maker of forged valve components in Wenzhou, is among the companies that say its customers face cash-flow problems. “We are facing quite a lot of delays in payment,” said Yu Mingliang, the company’s vice president of business development. “We ended up suing one company.”
Even if it wants to ramp up spending, Beijing is bumping up against tapped-out local governments. That is partly by design: Much of what’s ailing the economy now is the result of rampant local-government borrowing via vehicles created for the purpose with little oversight. New policies have been aimed at reining in such loans.
As Beijing tries to speed up investments in airports and other infrastructure projects, these policies could leave the municipalities and provinces unable to find funds to see the plans through.
Funding constraints have already forced some cities to slow down big-ticket investments. In Wuhan, an industrial city in central China, the city government has halted construction of a bridge across the Yangtze River since last year due to insufficient funds, according to local officials familiar with the matter. The bridge, with a planned investment of about 8 billion yuan, could help ease local traffic congestion. Press officials in the city government didn’t respond to a request for comment.
An aggressive anticorruption campaign, which the government deems essential to maintaining the Communist Party’s grip on power, is also dragging down spending and, some analysts say, impeding government decision-making. Lu Ting, a China economist at Bank of America Corp., has estimated the austerity push has pared between 0.6 and 1.5 percentage points of growth from China’s GDP.
The World Bank has already downgraded its outlook for the global economy. In a report released last week it estimated the world economy would grow 3% this year, compared with the 3.4% projection it made last June. It said a slowdown in business investment in China alone could shave 0.3% to 0.5% from global economic output.
Speaking to an investor conference last week, General Motors Co. President Dan Ammann called China “the major engine of growth” for the global auto industry for the past decade and a half.
He said the auto maker still sees big opportunity in lower-profile cities in China, but “we’re no longer in an environment where you can just build something and expect to sell it.”
In recent months, as growth in China’s residential real estate has slowed, United Technologies Corp. has said it is coping thanks to stronger orders for government infrastructure and large commercial projects, like an order for 103 elevators and escalators for a new tower in the northern city of Tianjin.
Meanwhile, its Otis Elevator business has also been trying to boost the percentage of service contracts it maintains for elevators already installed in China, which can provide steady earnings even when construction growth slows.
The global effects of China’s slowdown have hit unevenly, with the World Bank projecting that emerging markets, whose economies rely more heavily on trade with China, will be hit the hardest. The World Bank estimates economic output in Brazil will expand just 1% in 2015, down from a June forecast of 2.7%.
Commodities importers, on the other hand, might receive some secondhand benefits as the price of imported shipments decline. The U.S. could be among these beneficiaries. The World Bank raised its estimate of U.S. economic growth to 3.2% from 3.0%.
Should growth decline precipitously in coming months, economists say Beijing has a number of options, including deeper interest rate cuts, faster spending on infrastructure projects and sequential reductions in the capital that banks must hold on reserve with the central bank. The risk, however, is that if pursued too aggressively such measures could worsen overcapacity and pile up more debt.
“If things start to deteriorate rapidly, they might have to shift their policy approach,” said Julian Evans-Pritchard, an economist with research firm Capital Economics. “But if it doesn’t, I don’t expect much change in policy.”
Source: The Wall Street Journal