21 February 2020
China must take drastic action to fight air pollution and minimize the economic loss. Photo: AFP
China must take drastic action to fight air pollution and minimize the economic loss. Photo: AFP

WEEKENDER: Leaders face crucial test as economy slows

The preliminary China purchasing managers’ index from HSBC/Markit for February, which was released Thursday, sank to a seven-month low, stoking fears of a significant slowing, if not hard landing, of the economy.

The gauge dropped to 48.3 from 49.5 in January. A reading below 50 indicates contraction. Most categories including new orders, industrial output and stock levels declined, indicating weak demand. The employment sub-index has fallen to 46.9, the lowest since February 2009. Pressure for job creation will grow if company orders continue to drop and the pace of economic growth slows further.

The marked slowing of China’s economic growth looks set to put more pressure on the Beijing leaders, who have put economic restructuring on top of their work agenda for 2014. Analysts said the possibility of more fine-tuning measures to maintain economic growth should not be ruled out.

Li Daokui {李道葵}, a professor at Tsinghua University and a former adviser to the People’s Bank of China on monetary policy, said: “The start of the year hasn’t been too good. We may need to prepare for somewhat lower growth.”

Dark clouds are gathering over China’s economy, the second largest in the world, on the eve of the annual “two meetings”, namely the yearly plenums of the National People’s Congress and the Chinese People’s Political Consultative Conference, next month.

Premier Li Keqiang, who succeeded Wen Jiabao in March last year, is due to announce the nation’s target gross domestic product growth rate in a government work report, scheduled for delivery at the NPC’s opening session on March 5.

Last year, the economy grew 7.7 percent, slightly higher than the goal of 7.5 percent. In a bid to change the “GDP worship” mind-set among officials and create more room for bolder reforms to tackle difficult structural issues, Beijing leaders have softened their rhetoric on the GDP growth rate. Li said last year a modest 7.2 percent growth was enough to create jobs.

Most economists predict China will keep a goal of 7.5 percent economic growth in 2014.

Amid doubts over the country’s economic performance this year, the emergence of below-expectationeconomic data has given rise to fresh speculation in the financial sector about the chance of a hard landing. Worries about China’s slower growth have spread across emerging economies. Investment banks have made serious assessments of such a risk.

The hard-landing talk may sound alarmist at the moment. There is no doubt a host of structural deficiencies in China’s economic and financial structure have become more apparent, causing more constraints to growth even as the national leadership starts to tackle the problems.

Take local government debt as an example. As maturing local government loans are due to peak this year, the central government has stepped up precautionary measures to avoid a financial crisis. Local government investments are expected to drop sharply. Given this background, it’s not surprising that at least 22 provinces have already set lower GDP growth rate targets for 2014.

The heavy smog that hit Beijing and neighboring areas Thursday is a grim reminder of the urgency of taking drastic action to fight air pollution and minimize the economic loss. At a State Council meeting last week, Li ordered that the target for reducing industrial overcapacity be brought one year earlier than originally planned. Although the curbs on industrial overcapacity will bring benefits in the long term, the exercise will put more pressure on a slowing economy in the short term.

Meanwhile, the continued crackdown on official extravagance in hosting banquets and giving gifts will dampen consumption and overall economic growth.

With the pressure on jobs set to grow amid slowing manufacturing activity and concerns about bad loans lingering in the short term, analysts have predicted that the central government might loosen monetary policy in the next few months to maintain stable growth. Linus Yip, a strategist at First Shanghai Securities, told the media: “You have to expect Beijing to act if the economy slows down more from here because they cannot proceed with their reform agenda without maintaining a certain level of growth.”

Vowing to take the decades-old reform policy to a new phase by deepening reform, Chinese leaders have indicated their willingness and preparedness to change their mind-set by allowing growth to slow, but subject to a so-called bottom-line rate.

Signs of a slowing economy in recent months have not come as a surprise. Communist Party leaders understand well enough they ought to bite the bullet for the development of what they call a more sustainable, balanced and healthy economy. The time to test their determination to walk the talk appears to have come earlier than anticipated.

Chris Yeung is deputy chief editor of the Hong Kong Economic Journal. This column appears every Friday.

– Contact the writer at [email protected]



He was editor-at-large at the South China Morning Post and, more recently, deputy chief editor of the Hong Kong Economic Journal.