Citizens of most countries in the developed world would be positively ecstatic to learn their economy was growing by 7% a year. For the Chinese, however, it’s unbearably slow. The recent deceleration raises the prospect of civil unrest in the absence of new jobs. For foreigners, including Canadian investors, it means that the global economy’s last, best hope might be fading fast.
China is accustomed to an astounding annual growth rate of 10% or more. Its current malaise stems primarily from far more serious troubles in its main export markets, Europe and the U.S., which are starting to weigh on its world-beating manufacturers and exporters. Meanwhile, home prices are in decline, and auto inventories are rising—signs that all is not well with Chinese consumers, either. In Beijing, there is paralysis and acrimony; in late 2012 the ruling Chinese Communist Party will select its next generation of leaders, and now China is squabbling again with Japan over uninhabited islands in the East China Sea.
Compared to developed countries, China retains considerable leverage to stimulate its economy. Beijing has reportedly undertaken a flurry of initiatives in recent months, for example, directing state companies to increase spending and fast-tracking new infrastructure projects. But that’s not enough for some critics, who want to see more aggressive fiscal and monetary measures. Jianguang Shen, an analyst with Mizuho Securities Asia in Hong Kong, warned in a report to clients that the government’s reticence “is closing the window to avert a hard landing.” Meanwhile, BOCOM International Securities, also of Hong Kong, told clients it did not expect significant monetary stimulus. “As such, it will be difficult for the economy to recover strongly,” wrote analyst Hao Hong. “And the stock market, too.” The Shanghai composite index is down 6% so far in 2012 (as of mid-September) and at its lowest point in three years.
Part of the problem is that Chinese policy-makers are already walking a tightrope. Their last major round of stimulus, in response to the 2008–09 financial crisis, prompted inflation and a degree of folly—investment in useless assets. Meanwhile, they are also struggling to transform the economy. They already accept that growth relies too much on foreign demand and investment in fixed assets, and have introduced policies to encourage Chinese consumers to spend more. “Securing a transition of this sort without any hiccups would prove a remarkable challenge,” observed TD economist Martin Schwerdtfeger in a recent commentary. Now that export markets are drying up, China may be forced to move more quickly than originally intended.
To put things in perspective, virtually nobody’s expecting a crash for China. A recent survey of 45 economists by Bloomberg revealed a consensus that its economy will grow about 7.5% to 8% in 2012 through 2014. Schwerdtfeger pointed out that China’s excessive investment in fixed assets was made possible by a massive predilection for savings among Chinese citizens, corporations and governments— a problem most western countries would love to have. For now, China remains among the most comely contenders in a beauty contest otherwise populated by less attractive investment options.
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