China Slows Down by Own Standards

The march of the Chinese dragon is relentless. However, it is not immune to the economic morass of its major trading partners and is experiencing a slowdown in growth rate that is more rapid than anticipated. Consequently, the government is implementing economic and social confidence-boosting measures.

The achievements of the Middle Kingdom are impressive: the second largest economy, the biggest exporter, the most foreign reserves and rising per capita income. The Chinese currency may even challenge the U.S. dollar, eventually, as a reserve currency.

Yet for all its successes, there were several imbalances in China’s model of a mixed economy. Firstly, having seen the Asian Tigers (Hong Kong, Singapore, Korea and Taiwan) taste success with an export-driven growth strategy, China followed suit. China’s success at exports is exemplified by medical device maker Mindray Medical International Ltd. (MR - Analyst Report).

Secondly, huge investments and hyper-lending created asset bubbles a few years ago. Consequently, the government went into firefight-mode to cool the overheated economy. The first signs of success appeared last summer with Premier Wen Jiabao announcing a slowdown in inflation, which was followed by a cooling off of property prices.

However, the government’s search for a Goldilocks economy -- not too hot, not too cold -- may have backfired somewhat. Latest statistics indicate that exports to the EU slipped 9% year over year while U.S.-bound exports dropped 5% last October. While overall export growth was sharply lower on a month-over-month basis, the composite growth rate at 15.9% was still respectable, partly on account of buoyancy in Latin American markets.

There are other telltale signs of a slowdown. The economy grew at 9.1% year over year during the June to September period, which represents the slowest growth rate in the past couple of years. Then, in November, the Purchasing Managers’ Index (“PMI,” a gauge for manufacturing sentiment) touched 49, its lowest point since 2009. In fact, it was the first time in nearly three years that this measure went beneath the critical 50 level.

The Chinese government has reacted to the challenges. Earlier this month, it cut the cash reserve ratio to infuse liquidity. Among other measures, a politburo member has asked local officials to enhance their social management skills in order to curb labor unrest and strikes.  

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