This weekend, new data on China’s economic growth showed that this economic powerhouse is losing its momentum and risks missing its growth target of 7.5% for this year. In May, exports posted their lowest annual growth rate in almost a year at 1% and imports fell 0.3% against an expectation for a 6% rise. Both of these reflect the falling of demand in the both the domestic market and foreign markets, most notably China’s top export markets of the United States and the European Union. Inflation in May slowed to 2.1%, the lowest in three months, indicating reduced output and slow growth, and central bank data showed that only 667.4 billion RMB ($109 billion) in new loans were made, falling far below the expectation of 850 billion RMB.
The new central government leadership of China, led by President Xi Jinping, is keen on restructuring China’s economy to increase domestic consumption and move away from reliance on exports and investments for growth. The government has been cracking down on currency speculation disguised as export trades to avoid capital controls that had fueled previous double-digit rises in export growth. But with the prospect of poor economic growth, the central government is pressured to take action to stimulate the economy and provide short-run relief. The central government took such action in 2008 to counteract the Great Recession by injecting a $4 trillion RMB ($570 billion) stimulus package into the economy. The central bank also has a higher chance of cutting interest rates to help increase growth.
However, the central government and bank are unlikely to do so for fear that they would exacerbate the property bubble that the central government has been trying to contain. The 2008 stimulus sparked a lending boom that fuelled a property bubble, and interest-rate cuts would lead to cheaper credit and a rise in property prices. President Xi Jinping and Premier Li Keqiang have also indicated that they will tolerate quarterly growth slipping to 7% before looking to take action to lift the economy, focusing more on economic reforms to boost growth.
This new leadership, which has only been in office for three months, has the difficult task of revamping the Chinese economy to deal with the slow economic recovery from the Great Recession and find a way to make China’s growth more sustainable. If economic conditions continue to worsen, the leadership will be pressured even more to step in with short-run assistance that could jeopardize any attempts to achieve long-run economic reform. It will be the responsibility of the new leadership under President Xi to withstand this pressure and commit to their goal of “maintaining long-term sustainable economic growth.”