China faces ‘notable downward pressure’ on growth

  • Sat Sep 8th, 2012 9:49pm
  • News

Bloomberg News

BEIJING — Chinese President Hu Jintao pledged to boost domestic demand and promote more balanced growth in the face of an export slowdown for the world’s second-biggest economy.

“Economic growth is facing notable downward pressure, some small and medium enterprises are facing a hard time and exporters are facing more difficulties,” Hu said Saturday at the Asia-Pacific Economic Cooperation CEO Summit in Vladivostok, Russia. “We have an arduous task of creating jobs for new entrants to the labor force.”

China is boosting spending in infrastructure, including $126 billion in new subway and rail projects, as economic growth slows. The economy expanded 7.6 percent in the second quarter, the slowest pace in three years, while exports rose 7.8 percent in the first seven months of the year, compared to a 23.4 percent rise in the same period in 2011.

The slowdown is increasing pressure on Hu as China’s leaders try to ensure a smooth transition of power at the Communist Party Congress, which will be held later this year. Europe’s debt crisis and anemic U.S. growth may hinder an export rebound as China copes with bad debt at banks and slumping corporate earnings.

Hu said China’s economy was characterized by a “lack of balance, coordination and sustainability” and that the country would promote “inclusive growth” to improve people’s lives.

Manufacturing slowed in August, according to surveys of purchasing managers, with one gauge at the lowest level since March 2009. Growth slowed after the government moved to counter rising inflation and property prices after its 2009 stimulus.

“They’ve screamed from the rooftops for three years they are trying to slow things down to kill inflation and to kill the property bubble,” Jim Rogers, chairman of Singapore-based Rogers Holdings, said Friday. “Now it’s happened.”

By focusing on infrastructure spending to boost growth, Hu and Premier Wen Jiabao may risk exacerbating the imbalances they have pledged to combat.

Spending on roads, bridges, subways and other public-works projects surged in 2009 and 2010 as much of the $630.5 billion stimulus, as well as a surge in bank lending, was directed toward local government projects. That led to a rise in debt at the local level to at least 10.7 trillion yuan as of mid-2010, according to an official audit.

Chinese shares surged on the news of increased government spending. The Shanghai Composite Index closed 3.7 percent higher at 2,127.76 Friday, the biggest advance since Jan. 17.

“The unintended consequences of this are legion,” Tim Condon, chief Asia economist at ING Groep NV in Singapore, wrote Friday, referring to infrastructure spending. “They include corruption scandals — for example, the railways minister was sacked and expelled from the Party over corruption charges — poor quality construction — the collapse of a section of the Yangmingtan bridge in Harbin city is emblematic — and stretched local government finances.”

Condon lowered his forecast for Chinese growth this year from 8.1 percent to 7.5 percent.

The National Development &Reform Commission, China’s top planning agency, said it approved plans to build 1,254 miles of roads, a day after it backed plans for subway projects in 18 cities.

“Some parts of the Chinese economy are going to be absolutely explosive and booming,” Rogers said. “Agriculture, pollution control, water. And some parts of the Chinese economy are going to explode because they are spending so much to deal with those problems.”