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10 threats to China’s economy

China is making the transition from cheap exporter to a consumer-led economy. Can the authorities manage its declining growth?

10 threats to China’s economy

Who knows how Europe’s crisis will pan out. It could, in the end, turn out to be a side show, distracting attention from the main event, and that’s China.

China’s economy is in flux. The government is attempting a shift away from cheap exports and towards an economy fuelled by Chinese’s growing ranks of consumers. In fact, the economy is already domestically driven, but it’s being propped up by government investment spending – uncertain foundations even for a country as cash-rich as China – rather than consumers themselves.

The Chinese authorities are now looking for ‘quality’ growth. This means the decade of 11% GDP growth is over; today we learnt that growth decelerated to 9.1% in September.  

But a controlled slowdown of China’s economy is proving an almighty juggling act, made more difficult by the global economic crisis.

The threats are many.

1. Inflation

Having risen to worrying levels – and though it remains uncomfortably high for the authorities – consumer prices inflation (CPI) appears to have peaked at 6.5% in July (and fell to 6.1% in September).

If inflation rises significantly again, then there will be a furious re-writing of City forecasts: the gentle ‘soft landing’ scenario (where growth slows as expected, but not below about 7%) will be scratched out and replaced with a ‘hard landing' doomsday forecast.

‘The thing that would scare me most would be if inflation started rising again… then authorities may have to tighten further. If inflation moved up to 7, 8 or 9% then a risk of a hard landing is substantially higher,’ said Brian Coulton of Legal & General. But, this is still not the emerging market strategist’s central scenario.

2. Europe and the US in crisis

How much of a threat does the growing economic downturn in Europe and the US pose to China? While the threat of a further weakening in Western demand was enough for the International Monetary Fund to downgrade China’s growth prospects, opinions over the future impact of a global slowdown diverge sharply.

Maarten-Jan Bakkum of ING says ‘the Chinese are very worried about Europe’. He adds that if a French bank went bust, for example, that could be the signal for Chinese to ease their policy, which in turn could be inflationary.

But Coulton reckons China’s authorities are squarely focused on their own domestic problems. ‘I’m not sure China is responding to external fluctuations in risk appetite.’

And as HSBC economists said in a note today, ‘even if western economies slip into renewed recession, the impact on China’s growth should be much smaller than three years ago’ as a result of China’s continued shift away from export dependency.

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6 comments so far. Why not have your say?

Anne-Marie Hugoson

Oct 19, 2011 at 07:53

I have no comment

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William Bishop

Oct 19, 2011 at 08:46

The biggest worry is the possibility of a property bust; while I would on balance expect the authorities to be able to avoid triggering this, the risk, and/or that of failing to stem a spontaneous implosion, is not insignificant.

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Anthony Palmer

Oct 19, 2011 at 09:32

It looks as if Anthony Bolton THE expert on investment matters, launched his investment trust at exactly the wrong time. We pay the experts to get it right!! what a disappointment.

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Tyrone Bell

Oct 19, 2011 at 14:02

Anne Marie Hugoson

Me neither

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vivekanandan nagarajan

Oct 19, 2011 at 17:37

Both china and India have most of the people/ families net worth invested or locked up in properties and gold. Both are overpriced and nobody encashes them.People are financially not educated.

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Sharon Turk

Oct 24, 2011 at 22:21

This American would love to see China's economy collapse. After all, a great many of the companies over there are "American", and I hope they pay for leaving us in the lurch.

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