To the long list of global economic anxieties — slow growth and high unemployment in the United States, the debt crisis in the euro zone, instability in the oil-producing Middle East — add a new concern: China.
This week’s massive sell-off in world markets was sparked, at least in part, by fears that China’s huge economy may finally be cooling off. A managed slowdown this year has been the stated goal of China’s economic policymakers, worried about steadily rising inflation and an overheated property market.
But the question now is whether the slowdown can be calibrated enough for a “soft landing,” or whether a more severe slump — a “hard landing” — is in the offing.
The answer matters to more than just China. When the world fell into recession in 2008, Chinese officials responded with a massive 4 trillion renminbi ($586 billion) stimulus package that spurred a boom in real estate, construction and car sales. China thus became a lifeline for some American companies such as General Motors, which was able to snap back from its 2009 bankruptcy because of the soaring demand for cars in China.
But the Chinese government has said it is withdrawing from stimulus spending and has been tightening bank lending to soak up excess liquidity. Also, officials here have repeatedly said there will be no new stimulus.
In other words, if the world is once again counting on China to help bolster the struggling global economy, China’s message to the world is: You had better look elsewhere.
“China can’t play the ‘save the world’ role,” said Guo Tianyong, director of the Banking Industry Research Center at the Central University of Finance and Economics. “China cannot act as the locomotive of world economic growth.”
China’s official growth target this year is said to be about 7 percent, but growth of between 8 and 9 percent still seems likely. That figure is enviable by Western standards, but well below the double-digit growth China enjoyed for most of the past two decades. Economists say China could drop to 7 percent growth or less before the government would become concerned enough to contemplate a new round of spending.
[Fears of an economic slowdown in China were one factor driving down markets in Asia Friday, especially in South Korea, China’s largest trading partner.]
“I don't think the Chinese government will come up with a similar stimulus plan” as in 2008, said Wei Yao, China economist at Societe Generale in Hong Kong. “China is able to bear it if economic growth slips to 8 or 7 percent.” She added, “I think the possibility of a hard landing is very small.”
For the moment, inflation — running above 6 percent per year as of last month — is a far bigger worry for policymakers in Beijing. Also, the 2008 stimulus — which saw the rapid construction of high-speed rail lines, new airports, highways, power plants and apartment blocks — created a host of problems that the government is grappling to solve.
The construction boom aided the global economy by boosting countries such as Australia, Chile, Brazil and Canada, which supply raw materials to China, and Germany, which sells heavy machinery and equipment. But the building spurt also created what many economists fear could be a hidden “debt bomb,” as state-run banks loaned money easily to local government-created investment entities.
As the government has started tightening bank lending, many small and medium-sized companies have turned to private lending sources and underground banks, further adding to the outside economists’ fears of a growing debt problem, largely obscured here by the opaque bookkeeping of many Chinese companies and unreliable statistics.
Those concerns seem to be gathering steam among investors, further weighing on a global economy being buffeted by bad news from the United States, Europe, Japan and the Middle East.
“It’s mostly psychological,” said Patrick Chovanec, who teaches at Tsinghau University. “Investors haven’t had many good stories to tell, and China’s been one of those stories.”
“The consensus view has shifted more negative on China,” Chovanec said. “You had these high levels of growth, but what’s sustaining it? Are you driving this investment boom with cheap money and easy credit? You’ve got a growing amount of bad debt in the system. You’ve got inflation in the economy.”
Chovanec, and various Chinese economists interviewed, said the government’s most pressing job now is to shift the country to a more sustainable growth path. That would mean moving away from relying on exports to the United States and Europe and investment-led growth — building new infrastructure — and creating instead an economy driven by domestic consumer demand.
Chinese leaders have been talking up the need to do just that. But by rejecting any further stimulus measures to prime the pump, China might also be depriving the global economy of its own last lifeline — the promise of continued high growth in Asia to off-set slowdowns elsewhere.
Economists said what may help the world now might no longer be good for China.
“The world exaggerated China's role in the global economy,” said Yi Xianrong, researcher at the Chinese Academy of Social Sciences, a government think tank. “China may have made some contribution to the world economy during the global economic recession in 2008, due to the 4 trillion remninbi stimulus investment. But I think that was totally a wrong move.”
“The stimulus package created substantial risk to China’s real estate financial system,” Yi said. “And it may lead to a financial crisis if the property market bubble bursts.”
Staff researcher Liu Liu in Beijing contributed to this report.