July 13th, 2011
07:27 AM GMT
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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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soundoff (14 Responses)
  1. Kyle H. Davis

    Hard crash... Period. – The Chinese government has no "economic superpower" or "enlightenment"; their economic growth is simple – "devalue/lock the yuan against our main trading partners". They took the ideas of Zhao and Deng, and twisted them into a constant increase in foreign trade to boost their economy; so much so that the nation is now dependent on it.

    Instead of working on their own internal economy, they have tied their hands behind their own back.

    They have been trying to balance inflation with trying to justify such a low trade value of the Yuan... it won't work. Even now, their idea of fixing it is by putting their finger in a dike (screwing around with interest rates), which don't even effect the masses.

    The large gap between the super rich and the poor is so immense here. There is no way to battle inflation with rural farmers watching guys drive by in new Porsche's while smoking $100 bills and snorting gold dust off the a$$'s of hookers. People generally wish to rise out of poverty, and the only way to do that is to increase prices (of anything).

    The only true development that is happening in China is in its foreign trade sector – Find a "development zone" in China, and you will find nothing more than a port area specifically designed for foreigners and foreign firms. Head outside of that area and you still have nothing new but housing and cars. Same 50 year old hospitals, crumbling schools (and education system), and a water system that probably predates the Qing Dynasty (sarcasm).

    It is a complete and utter mess economically. More money means nothing... just like it meant nothing to the Beverly Hillbillies (spot on comparison).

    However, the only silver lining to their eventual economic downfall is that the rate of development has been so fast that many of the people would adapt quickly to going back to "not having" – It's the youth that are going to be hit hardest. And, with the amount of Guanxi going on (corruption/nepotism/relations), the top guys are still going to remain on top.

    I foresee China doing NOW, what the government has always talked about "taking two steps back to make one step forward"... they THINK they have been doing that now, but the steps they need to take backwards, are in the near future.

    July 13, 2011 at 2:27 pm |
  2. Steve Thompson

    Here's what an economist with the American Enterprise Institute has to say about how delicate the balancing act will be for central bankers over the second half of the year:

    http://viableopposition.blogspot.com/2011/06/another-slowdown-whats-next-for.html

    While China is facing a severely overheated economy and has to take steps to tighten, the United States and Europe are both facing an economy that would be considered lukewarm at best. One misstep by central bankers from either country will finish off the global "recovery" and it's a return to 2008 for all of us.

    July 13, 2011 at 3:00 pm |
  3. That'snotTrue:[

    Well...................any fall is going to be softer than the US's default, better keep both eyes on the white house.

    July 13, 2011 at 6:22 pm |
  4. Mile Madinah

    China with foreign reservers in hundreds of trillion dollars is not going to see any stop in its growth in a near future. World wide recession might have a minute impact on China, but it could only result in a slow down, and I seriously question the intentions of the pundits of strategical forecasting who are predicting a stop on such a massive economy of the world?

    Rgds
    http://www.mile.org

    July 13, 2011 at 8:17 pm |
  5. yl

    This article basiclly said nothing, crash or no crash? I don't think Chinese economy will crash simple because it never happened before, it's still very controled economy, government can do a lot to inflence, not like US, stimulate paln did nothing, all it does is trying to paly with currency (printing money), it will either screw itself or world economy one day. Some of the Europeans(even including those living in China) just like to predict something based on their imaginations (more homework need to be done). They predicted HongKong will fall after 1997, if you open up those articles published around 1997, it all seem to be all 'craps'. Now they learn soemthing, so the ariticle like this comes out, yes? No? yes? No? oh, i said nothing. Why I just say I DON'T KNOW but I still pretend to know something

    July 15, 2011 at 5:06 pm |
  6. Sig

    At this rate of growth, the Chinese economy is not about to slow down anytime soon. Given the huge foreign investments the Chinese have made globally, and the level of control issued by the Communist Party on the economy. They have come too far to simply watch the economy crash. Sorry guys, it won't happen anytime soon. Its only going to get bigger and stronger.

    July 16, 2011 at 3:59 am |
  7. John

    Despite numerous interest rate increase, the Chinese property did not collapse. The reason being China has massive foreign reserves, huge trade surplus and healthy government revenue i.e. Tax income.

    The US on the hand, is having huge trade deficits, ever increasing budget deficits and still overvalued USD. The US government is filled with politicians that take care of their self interests and also their "corporate sponsors" rather than the general population.

    China can implement any fiscal, monetary and economic policies in a second notice to correct any economic imbalances. Meanwhile, the US government cannot even pass a simple budget, raise taxes, adjust debt limits even risking the country AAA debt rating and defaulting government obligations to social security, salary payment to government payroll???

    Is this what you call Democracy? The better side of Market Economy?

    July 16, 2011 at 8:09 am |
  8. Obverser

    In fact, no one know exactly the world economic would be either up or down,(including China's one). I had made investments in the past and I live in the West what the consultants and Bankers told me and predicted and so on ALL WRONG IT DIDNOT COME OUT ANY OF THEIR ADVICE CORRECTLY I made a loss and gain something based on my own instinct. So to my knowledge it is all about moderation and not too greedy, also the care for the people's life from all world leaders can pay off and make a BIG difference because The Law is very mystic....believe it or not the choice is yours.

    July 17, 2011 at 1:03 pm |
  9. John

    The USA cannot even pass government budget and raises debt limits. The Republican is holding the US citizens ransom, my way or the Highway! Is it WRONG to let the TAX cuts for the RICH AND FAMOUS expires? DOes it hurt the economy in any significant way if the top 1% or 5% contributes more to the tax revenue the US government needs?

    As a foreigner, it really baffles me. Logic does not apply anymore in the world of largest economy????

    July 17, 2011 at 9:20 pm |
  10. James

    Any economics guru out there will say that China relies mostly on outside investors in their country. No matter how big China's foreign reserves is if their economy is on a downhill sooner or later the country will fall - unfortunately, this time it will be a hard fall!

    July 17, 2011 at 11:49 pm |
  11. Kyle H. Davis

    @John – Sorry, but there is no "healthy government revenue" in China through income tax... China readily admits that one of the biggest problems is income tax evasion (i know more people here who DON'T pay taxes than actually do). And maybe you were not aware of Moody's recent report on the Chinese government's local debt... at an estimated 3.5 Trillion Yuan. – China's economic growth (the 'astounding' portion of it) is solely through international trade (which makes up over half of China's current economic growth).

    Again, there is no "sound economic planning" going on within the Chinese government. It has simply reduced itself to dependency on foreign trade through Yuan manipulation.

    Sure, the US is having some trouble, but that is the nature of a natural economy (natural compared to the planned Chinese economy). Economies are cyclic, and it will come back up... as long as the US Government stops relying on Chinese business and Chinese purchasing US debt. – THAT is what will kill the US, and China won't be far behind.

    The difference is between building and hoarding... the US builds, China hoards.

    July 18, 2011 at 7:26 am |
  12. Kyle H. Davis

    I mean... think about it... China has some of the largest Forex reserves, and a multi-trillion dollar trade surplus, but the government cannot even control its local debt? Can anyone say "mismanagement"? – That's like me sitting on a massive bank account and not paying my utility bills. I'll stick with the US system any day.

    July 18, 2011 at 7:28 am |
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    May 28, 2012 at 9:51 pm |
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    It is my belief that mesothelioma is actually the most deadly cancer. It contains unusual features. The more I really look at it the harder I am assured it does not conduct itself like a true solid human cancer. In case mesothelioma is really a rogue viral infection, hence there is the chance of developing a vaccine as well as offering vaccination for asbestos open people who are really at high risk regarding developing long term asbestos relevant malignancies. Thanks for giving your ideas about this important ailment.

    July 30, 2012 at 6:29 am |

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