July 13th, 2011
07:27 AM GMT
Hong Kong (CNN) – The world’s second largest economy is putting on the brakes. But will it be a slow decline, or a rapid stop?
China’s red hot economy eased, with second quarter figures showing Beijing’s GDP dropped to 9.5% compared to 9.7% year-on-year growth in the previous quarter, CNNMoney reports.
This is the lowest reported GDP for China since the third quarter of 2009. China’s GDP has been rising at an annual rate of around 10% for most of the past 30 years, growing 10.3% in 2010 alone.
Yet the most recent figures are not to be mistaken for a downturn – the second quarter growth rate was stronger than the market expectation of 9.4% forecast by economists in a Dow Jones Newswires survey. Analysts now expect the GDP to settle at around 9% growth for the full year of 2011.
This much-needed ease in growth reflects a temperate cooling of China’s overheated economy, amid increasing alarm that China’s boom is headed for a crash.
In March, Chinese Premier Wen Jiabao set an ambitious target for Chinese inflation to be kept around 4%, as China tries to rein in economic growth. As part of these measures, The People’s Bank of China increased interest rates five times since October 2010.
Chinese policy makers are acutely conscious that, left unchecked, China’s growth could backfire. Inflation has already led to soaring house prices, and increased living costs that are forming rumbles of discontent among the Chinese public, as CNN’s Ramy Inocencio reports.
Despite attempts to slow growth, China’s Consumer Price Index (CPI) jumped 6.4% in June, bolstered by surging food prices that increased 11.5% in April compared to 2010 figures.
Benjamin Pedley, head of the investment strategy for north Asia at HSBC Private Bank, told CNN that things are not as bad as they seem.
“If you strip out some of the volatile items in the CPI such as pork, you can see the number is not as bad as at first glance.”
Whilst Pedley acknowledged that the equity market would react negatively to the recent CPI figures, he said that they do not mean that China’s inflation is reaching critical levels.
“We do believe that inflation is in the process of peaking,” Pedley said. “Our view is that the pick up in inflation began in a serious fashion in the second half of 2010, so when you compare the numbers in the next few months with the latter stages of 2010, they will not look as bad as they do right now.”
Pedley also pointed out that measures such as the interest rate hikes take time to effect the economy. “We should see inflation ease back fairly soon,” he concluded.
For China’s concerned investors, it seems that inflation cannot decrease fast enough, as the mainland’s vastly over-valued property market remains a cause for concern.
Following the global economic crisis, China attempted to offset any domestic downturn by spending heavily on public works, constructing a myriad of roads, railways and real estate. This construction boom pumped four trillion yuan ($586 billion) into the economy, according to CNN Money.
It is this building boom that has driven up property prices, making it difficult for the average worker to afford property, and playing in to the hands of speculators.
So is China heading for a soft landing or a hard fall?
Fortune reported that Jim Chanos, the hedge fund manager who has been vocal in his criticisms of China’s economy, predicted late last year that the ballooning real estate bubble would pop – and this would spell trouble for the country’s economy.
Property woes have been further magnified by fears of mounting local debt. News of China’s GDP rate comes just a week after Moody’s Investors Service warned that China may have understated the debt load of local governments by $541 billion.
China now finds itself in a muddle, as it struggles to mediate internal and external concerns. It must balance domestic anxieties over escalating housing prices against worries that the Chinese economy – so important for global growth – could slow too suddenly.
As the WSJ reported last week, Wen emphasized several measures being taken to calm the economy, including controlling the money supply, encouraging the production of agricultural goods and increasing the supply of pork, for which prices have recently jumped. Wen also reiterated his commitment to implementing restrictions on the property sector, where construction has already showed signs of slowing.
As growth in its GDP slows, China has money in its coffers and the benefit of a command economy that – in theory – it can control. Detractors question whether China’s housing bubble is simply too over-inflated to decrease without a catastrophic burst, but only time will really tell whether China’s landing will be hard or soft.
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