China’s annual growth target for 2012 looks increasingly in jeopardy as demand at home falters and Europe’s debt crisis worsens, complicating matters for Beijing as the country heads into a once-in-a-decade leadership transition.
The slowdown in the world’s second-largest economy could be more entrenched than expected as Beijing’s property tightening measures dilute the impact of any fresh policy stimulus, diminishing China’s ability to offset faltering demand in Europe and the United States.
“I cannot see a bottom in economic growth. The general slowdown trend may not change anytime soon,” Shi Xiaomin, vice president of the China Society of Economic Reform, a government think-tank in Beijing, told Reuters.
HSBC’s flash PMI showed China’s factory sector shrank for an eighth straight month in June as export order sentiment hit its weakest level since early 2009, indicating the economic trough may extend well into the third quarter.
“The economy is definitely on a downward slope,” said Gao Shanwen, chief economist at China Essence Securities in Beijing.
Gao expects annual GDP growth to hover between 7-7.5 per cent in the second- and third-quarter, before a modest recovery towards the year-end as policy stimulus gains traction.
Premier Wen Jiabao in March cut the 2012 growth target to 7.5 per cent, which if realised would be the lowest since 1990.
While that target was seen as typically conservative for Chinese leaders, global conditions have deteriorated sharply since then, with much of Europe now facing a prolonged recession and the US economy appearing to be losing steam.
Analysts forecast in a Reuters poll in May that China would deliver second-quarter economic growth of 7.9 per cent from a year earlier, with full-year growth of 8.2 per cent, which would be the lowest since 1999.
But weaker domestic and overseas data since then has prompted some to cut forecasts and many analysts now believe second-quarter growth could be just over 7 per cent. In early June, the central bank surprised markets by cutting interest rates for the first time since 2008 to combat faltering growth.
Continued weak performance into the second half could increase the risk of missing Beijing’s 2012 target, although most analysts still see that as the worst-case scenario.
“I think they are likely to achieve it, but obviously there could be a risk,” said Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong.
“The bottomline is that they still want to stabilize growth because this is the year of leadership transition,” said Huang, who still expects the economy to grow 8.1 per cent in 2012.
But Shi maintained his bearish outlook that 2012 growth could slow to around 7 per cent from last year’s 9.2 per cent.
There is no authoritative definition of a hard landing in China, but analysts expect job losses to rise if GDP growth dips below 7 per cent.
The last time Beijing’s annual target was under threat was in 2009, when growth tumbled to just 6.6 per cent in the first quarter, before Beijing’s massive RMB4-trillion (US$629 billion) stimulus powered full-year expansion back to 9.2 per cent.
Unlike in 2008/09, the job market has remained relatively tight so far this year, partly reflecting the country’s demographic shifts, but evidence abounds that smaller and mid-sized private firms are increasingly struggling with slackening orders, rapid wage increases and higher raw material costs.
Sportswear brand Li Ning Co recently became the latest Chinese firm to issue a profit warning, saying earnings could drop sharply this year due to weaker sales, further dampening confidence in the power of the once-vaunted Chinese consumer to offset any external weakness.
Many local governments, bearing the brunt of economic slowdown, have been lobbying for Beijing to relax property controls and credit curbs to local projects, according government economists familiar with the policy-making process.
Local governments have seen revenues from property-related land sales tumbling, as they struggle to repay RMB10.7 trillion (US$1.68 trillion) in debt.
But Beijing has made clear that it will not repeat another massive fiscal stimulus similar to the one in 2008, which bolstered growth but left an unwelcome legacy of strong inflationary pressures and a potential property bubble.
Policymakers have so far offered a few modest and more targeted programmes, such as extending a “cash for clunkers” programme to boost car sales and offering incentives for consumers to buy more energy-efficient appliances.