China's slowing economy raises fears of 'hard landing'

Manufacturing, housing, and infrastructure are no longer growing at double-digit rates, leaving China more vulnerable to sluggish demand from overseas. A shift towards domestic-led growth is still a work in progress. 

A sharp slump in China’s trade performance last month is now ringing alarm bells about the overall health of the world’s second largest economy.

Figures released Sunday showed that Chinese exports fell in January by 3.3 percent from year-ago levels, while imports dropped by 19.9 percent – their sharpest fall since the global financial crisis in 2009. 

The news came against the backdrop of slowing GDP growth in China, which came in at 7.4 percent in 2014, the lowest expansion in 24 years.

To be sure, the government has been seeking to cool the Chinese economy for some time, knowing that decades of double-digit growth rates that stunned the world couldn't be sustained indefinitely.

But some economists are now wondering whether growth is slowing faster and further than the authorities intend. “There is definitely a real worry about a hard landing,” says Xiang Songzuo, chief economist at the China Agricultural Bank. 

The trade statistics surprised analysts here. But their negative implications are somewhat misleading because of falling global prices for commodities that China imports. “It’s a shocking figure…but the headline exaggerates how weak domestic demand is,” says Wang Tao, an analyst with USB in Hong Kong.

Slump in oil prices

This slump in the price of commodities like oil and iron ore accounts for nearly half of the sharp fall in imports in January, says Ms. Wang. Also, the preparations for the Chinese New Year holiday, coming up next week, during which many factories and construction sites shut down for weeks on end, distort the picture a bit. 

Still, the indications are that “underlying demand in China is not all that strong,” warns Arthur Kroeber, head of GaveKal Dragonomics, an economic consultancy in Beijing. “The lower import volumes are a leading indicator of lower economic growth to come.”

Can the government go down that path in a managed fashion?

“So far,” says Mr. Kroeber, the drop in growth "appears [to be] an orderly slowdown, not a jolting hard landing. But these things are very difficult to micro-manage. It is quite easy to come up with scenarios of a hard landing.”

The government has been trumpeting its intention to transform the Chinese economy from its dependence on investment and exports into an economy driven by domestic consumption. For the past 18 months it has also been pledging more market-oriented reforms to feed economic growth.

Those reforms are coming, albeit slowly. Official red tape has been cut, making it easier for small companies to set themselves up; health and social security plans are being expanded and given wider reach; and the government has begun to cut subsidies for public transport fares, utilities prices and rail freight rates. 

Traditional drivers of the economy slow up

But the “top of the agenda is reform of the state owned enterprises," says Mr. Xiang, "making a level playing (field) for private capital in strategic sectors such as energy and telecoms...And that is the most difficult” task.

Meanwhile, China's traditional economic drivers – infrastructure investment, export-oriented manufacturing, and housing construction – are seizing up. As growth slows, and tax revenues with it, there is less money to spend on government stimulus programs such as massive road and rail track construction. 

At the same time, two of China’s biggest export markets, Europe and Japan, are in serious economic difficulties, and China's real estate boom is past its peak.

Xiang is optimistic about the prospects for continued growth in businesses such as education, health care, tourism and entertainment. But he cautions against expecting any miracles.

“We are definitely in a period of dramatic shift from old sectors to new ones,” he says. “But this takes time. For the next few years growth rates will continue to decline.”