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The Economist, Finance and Economics. Rozy Collect

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China's economy

Defanging China's growthChina is slowing . That’s good news

Jul 15th 2010

DON’T paint a snake with legs, the Chinese will say, when someone is in danger of spoiling

something by overdoing it. For months China’s policymakers have been trying to slow the

country’s economy, which grew venomously in the year to the first quarter. The fear is that

policymakers will overdo it, spoiling one of the rare sources of dynamism in a moribund

world economy.

There were few signs of that in the economic

picture provided by the National Bureau of 

Statistics this week. China’s output grew by

10.3% in the year to the second quarter, the

bureau said, slower than its growth in the

previous quarter (11.9%), but not too much

slower (see chart). Inflation also eased, falling

back below the central bank’s official target of 

3%, thanks partly to cheaper fruit and

vegetables.

In recent months, the price of fruit and veg has

troubled policymakers less than the price of 

bricks and mortar. They worried that a property

bubble and a mortgage boom, if left unchecked,

might threaten the balance-sheets of households, banks and local governments alike. But

the average house price in 70 of China’s cities fell by 0.1% in June from a month earlier, the

first decline for well over a year. The drop follows the government’s efforts in April to curb

speculation in the property market by stiffening mortgage rates and raising down-payment

requirements.

As prices fall, homebuilding will follow. The government hopes to offset this decline with a

rapid expansion of affordable housing. It has set provincial governments a target of 5.8m

new homes this year. But Stephen Green of Standard Chartered doubts that local officials

will take this quota too seriously. They may buy unwanted housing off developers, which

would placate their overseers in Beijing but add nothing to China’s GDP. Or they may rush

to start projects this year, but take their time in finishing them.

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China’s slowdown is not necessarily bad news—by most measures, China’s economy is now

operating at full capacity. Nor is it really news. Other indicators of activity suggest the

economy has been slowing for some months. Although the country’s first-quarter GDP figure

was eye-popping, this was only in comparison with the miserable first quarter of 2009.

Several economists reckon the quarterly growth rate peaked last year.

Indeed, Mr Green thinks China’s policymakers have already finished the job of slowing the

economy. Unlike some of their neighbours, they have not raised interest rates. Nor did they

allow the yuan to strengthen against the dollar until last month. But in China, Mr Green

says, what counts is the “fine print” of policy. The government looks serious about curbing

credit, having told banks not to add more than 7.5 trillion yuan ($1.1 trillion) to their loan

books this year, a huge amount but still 22% less than last year. Regulators have also

stopped banks from co-operating with trust companies, which got around credit quotas byraising money from banks’ retail customers and lending it to property companies, among

others. The central government has begun to rein in local-government borrowing and it is

approving fewer infrastructure projects. But if policymakers fear they have added legs to

the snake, they will lift these measures as quickly as they imposed them.

Finance and Economics