China’s embattled economy is slowing faster than anticipated and could be headed for a long-overdue hard landing, analysts have warned.
The world’s second largest economy was “only just entering what will be a long and very painful period of economic transformation”, said Harvinder Sian, head of European macro strategy at Royal Bank of Scotland in London. He said China was already growing much slower than official estimates, and was set to decelerate even further.
On Monday, the World Bank predicted that China would grow at 7.4% in 2014 and 7.2% in 2015, below previous forecasts of 7.6% and 7.5%.
But Sian said even those lower estimates were optimistic. He tipped growth to be “at least two full percentage points lower”, grazing the 5% level this year and next. “China is going to have to get used to much lower growth levels than they have become accustomed to,” he said.
Analysts also questioned the quality of data from China’s National Bureau of Statistics. Mark Williams, chief Asia economist at consultancy Capital Economics, said forecasts that China was growing by more than 7% a year were “no longer accurate”. He said the real growth rate was likely to be 6%, or even lower.
Beijing has long flagged up the importance of transitioning to a mixed economy driven by services and exports, while encouraging higher rates of consumption. Some in China say that process is already under way, but others are less sure.
Sian said overhauling a vast and unwieldy economy was likely to be “extremely bumpy and problematic”.
Paul Sheard, chief economist of rating agency Standard & Poor’s, argued that reforming an entire economic system while dealing with a deflating credit and property bubble and an overhang of non-performing bank assets was taking Chinese policymakers into “uncharted territory”.
Pain will be global
A broader concern lies in the damage likely to hit economies that have become increasingly reliant on Chinese demand for everything from machinery to cars to base commodities. Waning demand for iron ore and copper would crimp growth in commodity-exporting nations like Australia, Zambia and Brazil, economists warned.
Germany was also suffering from ebbing Chinese demand for high end engineering equipment, said Sian. Industrial output in Germany suffered its biggest monthly decline in August for more than five years.
The one big unanswered question is how the Chinese government will react to a sharp economic contraction.
Political leaders have so far avoided the temptation to embark on a major new stimulus programme. “So far, authorities have been resistant to that option, and rightly so,” said Williams at Capital Economics. “The country’s fundamental problem is that of excess credit growth and excess investment. The last thing it needs is more.”
Analysts said it was unclear whether China would be willing to let its economy slow in the short term, merely in the hope of guaranteeing long term sustainability through consumption and services.
Most of the economy appears to be glaringly underperforming. Industrial output grew by 6.9% year-on-year in August, the weakest annualised rate since the financial crisis, leading many to tip fresh stimulus measures.
On Sunday, the People’s Bank of China cut short term borrowing costs for domestic lenders, a few days after injecting $81bn into the financial system. The central bank said it wanted to “maintain adequate liquidity and reasonable growth” levels, a sign that a new course of stimulus spending could remain firmly on the government’s menu.