China's economy unlikely to bottom out soon
Editorial 2012-09-15 15:15 (GMT+8)
Hu Jintao, back right, at the APEC meeting in Vladivostok. (Photo/Xinhua)
China's president, Hu Jintao, said in a speech at the recent CEO summit of the Asia-Pacific Economic Cooperation (APEC) that China's economy lacked balance, coordination and sustainability. "Economic growth is facing notable downward pressure," he said, promising to promote "inclusive growth."
Expectations of China's economy bottoming out in the short term may not be met. Recent statistics showed that the country's economy is continuing to slow down. First, the official purchasing managers' index dipped below 50 in August, the lowest in 9 months. Meanwhile, a flash PMI published by HSBC plunged to a nine-month low of 47.8 in August, indicating contraction in the manufacturing industry.
Second, China's exports grew only 2.7% in August, while its imports declined 2.5%, the first fall in seven months, signaling a decline in exports and weak domestic demand. Third, China's consumer price index rebounded to 2% in August due to soaring food prices, while its producer price index (PPI) dropped 3.5%, the seventh consecutive fall to the lowest level in 34 months. These developments point to worsening overproduction in China.
The key question is when China's economy will hit the bottom and whether it will achieve its targeted growth rate of 7.5% in March. What measures should China take to quicken the bottoming out and rebound?
While China's economic growth was merely 7.8% in the first half this year, some Chinese experts said it was likely to touch 8% this year. However, foreign institutional investors have been more pessimistic about China's economic outlook, with two institutions lowering their growth estimates from the 8% and 8.1% forecast previously to 7.5%, which is also the lower limit estimated by Beijing. If the situation does not improve, China's economic growth this year is likely to fall below its goal for the first time in several years.
Some Chinese media outlets commented that the country's economic situation is grimmer than the 2008 financial crisis and could take 3-5 years to bottom out.
It has been predicted that Beijing will let the renminbi depreciate slightly in the near future and raise tax rebates to stimulate exports. However, China's exports may not grow despite this, given that the global economy is unlikely to rebound in the short term.
Since December 2011, China's central bank has cut required reserve ratio three times and interest rates twice. Of late, the property market is showing signs of recovery, while CPI rose 2% in August. Therefore, to prevent inflation, the central bank is unlikely to ease its monetary policy further.
Meanwhile, Beijing is trying to boost economic growth by increasing investment in public construction projects. The government is reportedly planning infrastructure investments of 1 trillion yuan (US$158 billion) and has already invested more than 10 trillion yuan (US$1.58 trillion) in public construction projects in more than 10 cities.
However, it remains alert to overproduction caused by overinvestment in industries. In addition, while infrastructure construction and investments may stimulate the economy in the short term, they will not enable long-term development.
Given China's strong economic fundamentals, the government should not rely heavily on investments to bolster its economy. Instead, it should promote market reforms, technological innovations, and industry upgrades and transformation while formulating its economic policies. To sum up, it should adopt a complex policy mix to cope with its economic problems.
