China Falters

Tim Wallace
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■ Growth forecasts slashed on weak global economy
Burberry shares slump on falling Chinese demand
■ Leader-in-waiting goes missing for key meetings

ECONOMISTS have slashed China’s GDP growth forecasts as the emerging giant stumbles on the twin pressures of the global economic slump and bad domestic investments.

Premier Wen Jiabao was forced to hint that he could use the remaining 100bn yuan (£9.8bn) in the government’s fiscal stability fund to boost growth – although analysts have warned that large sums of government-led spending have been invested poorly, creating problems of its own.

Wen told the World Economic Forum he expects China to hit its 7.5 per cent growth target for this year, well down from the 9.2 per cent experienced last year, though even this reduced target may be missed.

And just as the country’s astonishing boom comes to an end, leader-in-waiting Xi Jinping has disappeared from public view, sparking a storm of controversy and increased uncertainty about China’s future direction.

Xi has not been seen since the start of the month and has missed public events and meetings with US secretary of state Hillary Clinton.

Economists at Barclays have cut their 2012 growth forecast from 7.9 per cent to 7.5 per cent, and their 2013 outlook from 8.4 per cent to 7.6 per cent, while ING expects GDP growth to come in at 7.1 per cent this year – the slowest rate in over 20 years.

“We think a growth recession – low growth and low inflation – not stagflation, is a more apt description of the current state of the economy,” said the bank’s analysts.

Fashion giant Burberry yesterday was forced to warn investors that Chinese demand has been lower than hoped, knocking £1bn off its market value as the firm’s stock dropped 19 per cent.

The FTSE 100 firm had previously performed strongly through the financial crisis in large part due to demand from Asia, but sales growth has ground to a halt in the months since June as luxury sales in China have slumped.

Domestic firms are also suffering. Chinese companies’ borrowing is relatively subdued according to data out yesterday, while imports fell 2.6 per cent in August and export growth slowed to 2.7 per cent.

Industrial production growth slowed from 9.2 per cent in July to 8.9 per cent in August, while the official manufacturing purchasing managers’ index – an influential indicator of business activity – turned negative last month at a nine-month low of 49.3.

“This reinforced recent evidence that the Chinese economy is not yet responding to the authorities’ stimulus efforts,” said Stefan Angele from Swiss & Global Asset Management.

However, households’ borrowing did increase strongly last month, perpetuating the country’s property boom despite efforts to slowly deflate the bubble.

Inflation rose from 1.8 per cent in July to two per cent last month, hurting hopes of more stimulus from the authorities, though the rate is not yet dangerously high.

And Standard & Poor’s recently warned that any additional stimulus package risks pumping money into bad investments – raising the spectre of a banking slump or a local government debt crisis, as both sectors have boomed in recent years.

The government pushed banks to lend to local governments through the financial crisis, allowing them to spend more on infrastructure investments.

But this has left banks with non-performing loans, pushing the government to find more innovative solutions to boost lending and investing – for example, last month it allowed local authorities to securitise loans.