Despite Slower Growth In China, A Hard Landing Is Still Unlikely

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Photo: China Photos/Getty Images

China’s economy is unlikely to experience a “hard landing,” according to remarks made by a speaker at a recent US-China Business Council (USCBC) event in Shanghai.In recent months, companies have expressed concerns about the outlook for China’s economy amid a continued slump in the United States and fears of the European Union plunging deeper into recession.

While PRC government regulators have been reticent about the possibility of issuing a major stimulus program, expectations of a boost in infrastructure spending during the second half of the year have some economists expecting annual GDP growth to exceed 8 per cent. 

Slowdown underway

In March, Premier Wen Jiabao announced that the PRC government had cut its official target for GDP growth in 2012 from 8 per cent to 7.5 per cent.

Growth during the first quarter actually surpassed official government targets, reaching 8.1 per cent year-on-year, according to the PRC National Bureau of Statistics, but it still trailed historical growth rates and many analysts’ predictions.

Recently released economic data showed that growth further slipped to 7.6 per cent in the second quarter, resulting in a 7.8 per cent growth rate for the first half of the year.

Topline Growth Indicators


1H Figure





Fixed asset investment


Real estate investment


Source: National Bureau of Statistics  

PBOC slashes interest rates

Along with the slowdown in GDP growth, China’s consumer price index (CPI), a measure of inflation, has fallen in recent months from a first quarter average of 3.8 per cent to three per cent in May, to 2.2 per cent in June. In response, the People’s Bank of China (PBOC) cut its benchmark interest rate on July 5 from 6.31 per cent to 6 per cent in order to encourage corporate lending and investment.

Meanwhile, analysts expect the PBOC will reduce the reserve requirement ratio (RRR) in the near term, though perhaps not until next month, according to Reuters. A further RRR cut could allow banks to lend an additional RMB 400 billion ($63 billion) to borrowers in order to support investment.

China’s efforts to moderate its economic slowdown are being closely watched by the international community. In a July 25 report, the International Monetary Fund noted that China seems to have achieved a “soft landing,” despite global headwinds, and that it expects to see growth around 8 per cent (and an inflation rate around 3.5 per cent) for the remainder of 2012.  However, the report cautioned that China would need to alter its growth model to achieve continued growth in the medium term—moving away from a growth model based on investment and towards one based more on domestic consumption.

Leaders mull further policy options

Facing a downturn, senior economic officials have been mulling possible additional policy measures to ensure stronger economic performance during the second half of the year. At a July 10 meeting with economists and business leaders in Beijing, Premier Wen Jiabao noted that China’s most urgent priority at the moment is to stabilise the economy. In order to do so, he called on officials to maintain a “reasonable” level of investment.

Following his meetings in Beijing, Premier Wen had taken to the road to observe local economic conditions and meet with provincial officials in various provinces throughout the country. In a speech in Sichuan Province, he warned that China’s economy has not fully rebounded and that “hardships” may continue.

The premier said the government needs to provide more financial support and tax breaks to companies suffering from weakening export growth, and vowed to fine-tune economic policies in the second half of the year, without giving specific details. Media reports suggest that economic officials will discuss specific policy measures at the State Council’s mid-year economic meeting, which was expected to begin as early as July 18. Recent reports indicate, however, the meeting has not yet convened.

USCBC board delegation discusses economic outlook

In late June, one of the State Council’s top economic advisors told a delegation of USCBC board directors that China’s economy would have “no problem” achieving 8 per cent GDP growth in 2012, in spite of lagging demand from Europe and lower than expected domestic consumption.

The USCBC board directors heard concerns from a diverse group of Chinese CEOs about growth, however, and the need for clearer policy signals from the government in the second half of the year. Chinese CEOs in particular expressed caution about government spending to boost growth and the resulting potential for fiscal pressures longer term.

Experts say 8 per cent GDP growth achievable

At a USCBC program in Shanghai, guest speakers Andy Rothman, China macro strategist at brokerage firm CLSA, and Barry Chen, managing director of InterChina Consulting’s mergers and acquisitions advisory practice, commented on the current state of the economy and what to expect in the second half of the year.

According to Rothman, China will not have difficulty in achieving an 8 per cent growth rate for the year. He explained the dip in GDP growth during the first half of the year was largely a result of banks and local governments overreacting to central government calls for tightening infrastructure spending in their localities.

Following two quarters of slightly underwhelming growth, central government regulators have reportedly instructed local officials to adopt a less conservative approach to approving infrastructure projects. To be sure, infrastructure spending grew by 17.5 per cent year-on-year in June, up from 9.7 per cent in May and 13.2 per cent a year ago, according to CLSA.

Growth out west

Even though China’s overall GDP has slowed, growth in China’s central and western regions is booming, according to localstatistics.

While growth in traditional economic hubs, such as Shanghai, Zhejiang, Jiangsu, and Guangdong provinces, all slightly exceeded 7 per cent (with the exception of Jiangsu, which recorded 9.9 per cent), growth in emerging localities, such as Chongqing, Sichuan, and Shaanxi provinces, reached 13 per cent or higher. Indeed, most provinces in eastern China reported growth figures of lower than 10 per cent, while inland provinces all exceeded that rate. 

GDP Growth by Province


1H GDP Rate

Eastern China












Central & Western China













Companies re-evaluating competitiveness in China

At USCBC’s event, Chen explained that more modest economic growth has compelled some companies in China to evaluate their long-term competitiveness there, and that some companies in export-oriented sectors are increasingly relocating their operations to other countries.

In addition, companies are responding to changes in the economic landscape by automating their production facilities and restructuring their supply chains to manage operating costs. Chen noted that the economic slowdown hasn’t adversely impacted everyone, however. Cash-rich domestic Chinese companies are reportedly using the slowdown as an opportunity to acquire their competitors in order to increase market share. 

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