HSBC’s China flash purchasing manager’s index for May should not have spooked investors as it did. The index gave its lowest reading in seven months, at 49.6 against’s April’s 50.4, suggesting that China’s economy had slipped back into contraction, reversing the modest expansion seen since last fall. Yet irregular indicators of China’s slowing economy — and the constraints on policymakers to address it — have been readily apparent to those who cared to look.
Power consumption in the first four months of this year rose by 4.9%, against 6% in the same period a year earlier. Non-performing loans on the books of China’s banks have risen for six consecutive quarters, adding to policymakers’ concerns about the heavy overhang of local government debt. Overcapacity in the country’s heavy industry is legend.
China’s new top leadership has resisted short-term fixes. President Xi Jinping and Prime Minister Li Keqiang have repeatedly underlined the need for deeper structural reforms to rebalance the economy. How well they manage the economy’s inevitable transition from the double digit growth China averaged over the past three decades to a slower growth trajectory will mark their likely decade in power.
In truth, they have limited scope even for short-term fixes had they wanted to apply them. Monetary policy is loose. Total social financing, a measure of credit expansion, was two-thirds higher in the first four months of this year than in the same period a year earlier. Additional easing or kicking off another round of government funded infrastructure building only risks further inflating the property and local government debt bubbles.
At best, policymakers are likely to sanction only limited stimulus measures where local employment conditions put social stability at risk. Tight labour markets are getting slacker, but not by much and then selectively. Financial risks remain the greater concern. Li warned only last week that too much reliance on government stimulus measures is unsustainable and risky, and that government needed to take a smaller role in the economy.
China’s first quarter GDP growth, at 7.7%, was slower than the fourth-quarter of 2012’s 7.9% but still above the official target of 7.5% for the full year. The second quarter figure could come in at around the same level as the first quarter’s, but the economy will need some help from the global economy if it is to get anywhere near the 8% growth for the year that private economists had earlier forecast. It does not look as if it is going to get much help from Beijing, where holding the line is about the best that can be done.