China's economy is coasting into a gentle slowdown as 2004 nears its end, proving yet again that the economists in Hong Kong brokerage houses can sometimes get it wrong. The "hard landing" that some predicted has not materialized and nor is it likely to this year.
But that is this year. What about 2005? New questions on whether Asia's locomotive economy may run out of steam next year are starting to crystallize. The answer, as ever in China, is complicated. It is true that the key drivers of growth in 2003 and this year – rising property prices, heavy investment spending, surging demand for cars and robust industrial profits – are starting to show fatigue.
The government has decided that housing prices, which have risen to 10 times the average urban wage in 35 Chinese cities, need to be brought to heel. Beijing does not want to cause a property crash, it wants to bring price rises down to about one or two percent a year from around 15% in many large cities.
As property prices ease, construction activity will decline, as will borrowing by local governments using property as collateral. This in turn will hit steel, aluminum and cement demand – all materials used in the construction sector. Then as steel, aluminum and cement companies scale back on their capacity expansion, demand for steel, aluminum and cement will fall still further.
Such a scenario is unlikely to unfold for several months to come because property prices, though slowing, remain buoyant. Nevertheless, other sources of growth are showing clearer signs of a slowdown; industrial inventories are rising, and profit margins are narrowing.
Serious inventory build-up
A survey of 5,000 large and medium-sized companies by the People's Bank of China, the central bank, found that inventories climbed 19.9% to RMB 953 billion in July compared with the same month a year ago. This was the highest level since 1996, the year before China's growth embarked upon a three-year slowdown.
Car sales are a typical example. Last year, they grew at around 80% year-on-year but in the last couple of months, this growth rate has come down to around 10% a month year-on-year. One of the reasons for this slowdown has been clogged traffic on city roads and a growing reluctance among banks and finance companies to extend vehicle financing.
What remains unclear at this point is how quickly the fatigue will set in. So far there is no evidence to suggest that a crash is in prospect. In addition, it remains possible, or even likely, that new growth drivers will emerge to take up the slack from the current ones. Among these are several essential areas of infrastructure: power stations, electricity transmission lines, ports, airports, bridges, railways and roads. Aside from this, the rural economy is showing unprecedented signs of activity, as rising crop prices drive up rural incomes and create consumer societies in areas where none previously existed.