Slowdown? Could be

Just how slow is not clear, but the China bears, who have mostly been in hibernation the last two years, have started to stir.

A slowdown of sorts, we should not forget, is just what the Zhongnanhai doctor ordered for the economy. Starting in earnest May, 2004, the central government began squeezing sectors it considered had got too off the leash.

Steel, aluminium, cement, power and real estate were targeted, using two instruments ordering banks to be tighter with their loans, and setting a higher bar for projects that needed central government approval.

Some of these sectors have proved harder to rein in than others. The steel and property markets have fought hard to keep their own merry way, and cement has gyrated wildly up and down.

The government has long wanted investment, or more precisely overinvestment, in these sectors to come down. Overinvestment is wasteful and eventually leads to deflation, something the government has been trying to beat the economy out of, on and off, for some years.

In the first four months of this year, the investment rate has been falling substantially, which in normal times, would result in a consequent fall in China's GDP growth rate. After all, investment has been responsible for nearly half of China's growth in recent years.

That hasn't happened, for two reasons. The most important is that exports have galloped ahead, while imports have relatively stagnated, swelling the trade surplus and making up the slack to GDP growth from falling investment.

The second reason is the way China's statistics bureau fiddles with the GDP number at the margins to smooth out the jagged edges, much as Jack Welch managed to achieve with GE's earnings.

From the statistician's point of view, massaging the numbers will ensure that the leadership's estimates will not be embarrassingly off the mark.

Whereas growth was probably underestimated last year, China watchers now reckon that the present 9.4% clip is probably about right, or if anything, a little too optimistic.

Over time, however, the present rate growth in exports probably can't be sustained, and not because some protectionists in the US want to stem the tide. It is just that the US, especially if it slows, will not be able to absorb ever-increasing shiploads of goods from China. Stagnation in China and Japan will choke off rapid growth there as well.

If exports fall, and the government wrestles investment to the mat, Beijing will need the Chinese consumer to step into the breach. It is a role that the proverbial consumer, worried about mortgage payments, job security, supporting their children and/or their parents, has so far been disinclined to play with any gusto and there is no sign that this will change.

So China is slowing. If it slows to 7-8%, that will be fine. Any lower, and the government will start to worry.