China's economy heads for slower growth

Updated: 2011-04-07 20:48
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BEIJING- China's tightening efforts against rising prices will dampen its economic growth in coming months, analysts say.

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Yang Jianlong, a senior researcher at the Development Research Center with the State Council, said uncertainties about the economy have grown in past weeks due to the squeeze-out policies.

"When a key engine cools and we are unable to find another to support economic growth, economic momentum will definitely weaken," Yang said.

Consumer spending, exports and investment, believed to be the three engines driving China's economic growth, are decelerating amid a string of macro control measures issued by the Chinese government, according to economic indicators.

Consumer spending hurt by inflation

According to the National Bureau of Statistics (NBS), retail sales, which measure consumer spending in China, gained 15.8 percent year on year from January to February. The growth rate was 3.3 percentage points lower than December's 19.1 percent.

For February alone, consumer spending growth slowed much faster, with a growth rate of 11.6 percent year on year. Meanwhile, the Consumer Price Index (CPI), a main gauge of inflation, shot up 4.9 percent year on year in January and February.

Consumer spending contributed to about 37 percent of China's 39.8 trillion yuan ($6.05 trillion) of GDP last year.

The NBS will release the March CPI figure and other economic indicators next week and many economists anticipate that the March CPI will climb above 5 percent year on year, or even as high as 5.6 percent, well above the 4-percent full-year CPI target set by the government.

The Guotai Junan Securities, one of China's largest brokerage companies, said in a recent report that the high inflation level undermined Chinese consumers' confidence. The company cut its forecast for 2011 consumer spending growth to 16.7 percent from the previous 19.8 percent after prices for food, daily essentials and gasoline all rose rapidly in recent weeks.

Only 14.2 percent of urban residents were willing to increase spending under the current price levels, the lowest percentage since 1999, as indicated by results of a quarterly survey by China's central bank in 50 cities in mid to late February.

Export growth slacks

The slowdown also occurred in foreign trade, another important growth engine for export-oriented manufacturers in China's eastern and coastal areas.

China recorded a trade deficit of $910 million in the first two months of this year, compared to a trade surplus of $21 billion in the same period last year.

According to Yang's projection, China's export growth will be around 20 percent in 2011, or 10 percentage points lower than last year's expansion rate; while the trade surplus will fall to $140 billion, compared to $183.1 billion last year.

"This means the exports' contribution to China's economic growth might be negative this year," Yang said.

Yang noted that the base number of China's foreign trade was very high last year, thus making it very difficult to maintain robust growth year on year in 2011.

China's exports jumped 31.3 percent year on year last year to $1.58 trillion while imports surged 38.7 percent to $1.39 trillion.

A stronger Chinese currency, the yuan, will influence China's exports this year, too, Yang said.

The yuan advanced to a record high of 6.5456 per US dollar on Tuesday. The Chinese currency has thus far appreciated about 1.2 percent in terms of its reference rate this year.

"The yuan is widely expected to appreciate at least 5 percent this year," Yang said. "If so, the impact of the exchange rate, as well as rising labor costs, on China's exports will wipe out the benefits brought by the recovery in the European Union and the United States."

Hu Yuexiao, a chief macroeconomic analyst for Shanghai Securities, anticipated China's trade deficit to continue in March, as prices of iron ore and crude oil, which account for a quarter to one third of Chinese imports, stayed stubbornly high in global markets.

Hu said the era of substantial trade surplus has ended for China since its demands for commodity imports grew while its exports growth slowed.

"Under such circumstances, even if the importing price of commodity weakens in the future, the surplus will be limited," Hu said.

Investment potential eyed

Over the past decade, China has heavily relied on investments to secure its strong economic growth.

To rebalance its economy, the Chinese government set the annualized economic growth rate for the next five years at 7 percent while pledging more funds for public housing construction and water resources facilities maintenance.

A study by the Research Institute with Soochow Securities showed Chinese economic circles were directly linked to the country's monetary policies, which influence its investment-driven demands.

The aggregate impact of the current macro control policies on investment will be more evident in the second quarter when the rebound of investment in China is not sustainable, said Huang Lin, deputy director of the Research Institute with Soochow Securities.

China's central bank has adopted a series of tightening measures this year, including hiking interest rates twice and raising banks' reserve requirement ratio three times, to squeeze out liquidity available for investment lending in the market.

A package of policies to curb runaway housing markets, such as higher down payments and mortgage rates, will also discourage investment in real estate, a major industry that boosted China's economy during the past decade.

Huang said China's state-owned enterprises (SOEs) had eased their expansion activities in the first two months of this year due to the tightening, as investments for new projects slid 23.6 percent year on year during this period.

"A monetary tightening measure will not sustain the continuous growth of investment," Huang said.

Other analysts, like Yang, remain optimistic, however.

"Investment is the only thing I look forward to in 2011," he said. "It will keep a growth rate between 22 percent to 24 percent in 2011, which is much better than consumer spending and foreign trade."

Investment growth in manufacturing and water resources facilities might make up for the slowdown of investment in real estate sector, where the investment will still grow 21 percent year on year, compared to last year's 34 percent, Yang said.

"Such a speed will be hard-won achievement under the tightening conditions," he added.