China warns of persistent economic problems

China's Premier, Wen Jiabao, warned the country faces "huge" downward economic pressure. Jeff Glor spoke with Jack Otter, executive editor of CBS Moneywatch for insight into the global repercussions. Xie zhengyi

(MoneyWatch) Chinese Premier Wen Jiabao is warning that his country faces faces significant economic problems that are likely to persist for some time.

"The downward pressure on our economy is still big, and the difficulties may last for a while," he said Wednesday during a visit to the coastal export province of Zhejiang, where he met representatives of domestic and foreign businesses.

Wen's comments followed a raft of data last week that suggest China's economy has not stabilized despite the government twice cutting interest rates this year in a bid to boost growth. The country's export growth, factory output and retail sales further weakened in July, the latest in a slew of statistics showing that the world's second-largest economy is slowing down.

Concerns are growing that China could post its weakest showing since 1999, with GDP growth of 8 percent this year, down from 9.2 percent in 2011 and 10.3 percent the previous year. Although China's rate of expansion far exceeds that of any of the world's developed economies, that decline threatens to hurt the already fragile global economy.

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With so many other nations struggling economically, investors continue to hope that China can drive a worldwide recovery. However, Beijing is understandably more concerned about the impact of a struggling economy on its own people.

China has made enormous strides in improving its standard of living in recent decades. The proportion of its population living at or below the poverty line has declined from 84 percent in 1981 to 13.1 percent in 2008, according to the World Bank. Despite that progress, the country is still estimated to have more than 100 million people living on $1.25 or less a day.

Strong growth in China is critical for sustaining that progress. With the weak social safety net in China, the government would be hard-pressed to take care of a large number of economically displaced people. Beijing is already seeing increased social unrest from people unhappy with a number of issues, including widespread corruption in both the government and private sectors, and fallout from a collapsing real estate market.

Other recent signs of economic turmoil in China:

  • July exports rose just 1 percent over a year ago, sharply below forecasts of 5 percent. Excluding a fall in exports in January, that 1 percent rise is the weakest since November 2009 and a huge drop from annual growth in June of more than 11 percent. Import growth in July fell to 4.7 percent from the previous month's 6.3 percent, also below expectations.
  • Although passenger car sales last month rose 11 percent, to 1.12 million, that is down from the 15.8 percent rise in June, according to the government-sanctioned China Association of Automobile Manufacturers. Total vehicle sales rose 8 percent to 1.38 million, down from the previous month's 10 percent gain.
  • Output growth for China's factories in July was 9.2 percent year-over-year, down from 9.5 percent in June and the slowest growth since the 2008 financial crisis.
  • China's producer price index in July fell 2.9 percent from a year earlier and is down 2.1 percent from June. While low commodity prices are one reason for this decline, China's industrial capacity also is outstripping demand. The IMF estimates China's capacity utilization has fallen from just under 80 percent before the crisis to around 60 percent today.
  • Over the first half of 2012, long-term loans to business -- a sign of investor and broader economic demand -- fell 26.6 percent compared to last year. Echoing this slowdown, banks loaned $84 billion in July, well below analyst expectations of nearly $110 billion.
  • China's crude steel output is expected to fall in the second half of 2012, according to a report published on the state-backed China Iron and Steel Association's website. That would be the first drop in 31 years. Profits in the steel sector fell by 95 percent in the first half of this year. Cement sector profits were down 50 percent.

As stark as these figures may seem, the situation in China is likely even worse than reported. The Chinese government is notorious for the inaccuracy of its economic statistics. Li Keqiang, who is expected to be the nation's next premier, told then-U.S. ambassador to China Clark Randt that official GDP figures are "man-made" and that he regarded them as being "for reference only." 

For example, China's car sales appear inflated because producers base their figures on vehicles shipped to dealers rather than on unit purchases. According to the China Automobile Dealers Association, dealers' inventory of unsold cars is also currently more than double its usual level.

Like most other major economies around the world, China continues to feel the effects from the collapse of an enormous real estate bubble. That was fueled in part by extravagant spending by the country's local governments, which borrowed heavily against inflated land values. This left them with $300 billion in debt and a huge number of ghost town-like housing and business developments.

Patrick Chovanec, associate professor at Tsinghua University's school of economics and management in Beijing, has pointed out that while China's 2008 slowdown was due mainly to external factors, like falling exports, this year's slowdown has been mainly due to bad investments and other internal factors.

Still, China is perhaps better able to weather the slowdown than any other nation. It is the world's largest creditor, which means it has more reserves of foreign currency than any other nation. As a result, it likely will not have to borrow to fund any stimulus efforts. Its low inflation rate also means Beijing has a lot of room to act.

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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