China Loses Some Of Its Ambition

Many economists and experts at the IMF and World Bank have said that China’s GDP growth could be over 10% this year. That is based on the increased demand for consumer goods among China’s growing middle class and a potential rising demand for China exports which should be stimulated by a recovery of the economies in Japan, the US, and the EU.

It turns out that China’s senior leaders want to mute those expectations. Premier Wen Jiabao said that the world’s most populus nation will target GDP growth of only 8% this year. One of the reasons that China is less ambitious about its economic improvement are concerns that inflation will rise and the manufacturing sectors will “overheat.”   Economists have expressed both of these worries since China’s $585 billion stimulus package showed signs of improving production and demand for consumer goods. But, the liquidity pumped into the marketplace also caused a surge in bank lending and probably a rise in real estate and equity prices. China has begun to cut access to capital for both people and companies, a process that will slow growth.

The FT quotes Wen Jiabao as saying that the banking sector contained “latent risks.” In other words, capital availability has become so great that the government has lost control of the growth rate of the economy.

The 8% target could also be a screen. Factory output in China is up sharply and has risen since the middle of last year. This is extraordinary because the recession was still in full force in every large nation outside of China during most of 2009. The demand for Chinese goods could not have rebounded so considerably over such a long period. Western nations did need to replenish inventories, but that is not, in and of itself, enough to sustain a long-term increase in factory output in China.

It has probably begun to occur to China’s senior leaders that they cannot keep up GDP growth because the demand for the nation’s exports is slowing as the economies in the US and most of Europe lose much of the steam that they seem to have picked up in the fourth quarter of last year. A deceleration in the need for exports will also put pressure on China’s middle class which relies on factory jobs driven by rapid growth of industrial production and easy access to capital to keep up its demand for consumer goods. That, in turn, will add another weight to China GDP expansion.

China will not grow as quickly as expected this year because the global economy is stalling again.

Douglas A. McIntyre