China's economy heading for a hard landing?

In June China’s imports fell for the eighth month in a row, though there was a slight rise in exports of 2.8 per cent, following three months of export declines. 

Overall, China’s foreign trade fell by 6.9 per cent in the first half of the year, well below the government’s target of 6-per-cent growth for the year. 

This ongoing downturn in imports and exports in China is of particular concern to Thailand as China is our largest trading partner and China’s downturn is already hurting our economy with falls in both exports and commodity prices. 

There are various reasons for the economic slowdown in China. As a major exporter, its markets have been affected by the global downturn, while China’s manufacturing sector has become less competitive, with labour and other costs rising sharply. Meanwhile debt levels, especially in the shadow banking sector and municipal governments have grown strongly.

In response to such issues, the Chinese government is trying to engineer a structural shift to a “new normal” economy in which the traditional model of high growth based on big investment projects is replaced with consumer-driven growth. However as Credit Suisse points out, this will lead to slower growth, “typically a move from investment to consumption-led growth leads to a halving of the growth rate”. 

China does have advantages such as a massive domestic market and rapidly growing urbanisation. 

However, achieving a high growth rate based on consumption is still a challenge and the recent fall in the Chinese share market reflects such concerns. 

Moreover, the share market fall has dented consumer confidence and there are signs this could spill over into the property sector.

One pessimist about China’s economy is Morgan Stanley’s head of emerging markets Ruchir Sharma, who sees China as both at risk and a major source of vulnerability for the global economy. He points out that whereas China accounted for 23 per cent of global growth in 2010, it is now responsible for 38 per cent. 

It is the world’s largest importer of commodities such as metals, coal and many agriculture products and if China does have a hard landing, this would have repercussions around the world.

To support the economy, the People’s Bank of China has cut interest rates four times since November last year, while the government, regulators and state-owned banks intervened to support the share market last week. 

Meanwhile, recent statistics indicate some improvements in industrial production and investment in fixed assets, with investment growing by 11.4 per cent while industrial output grew by 6.8 per cent in the first half of the year. Hopefully this means a hard landing can be avoided.