China's economy is expected to show a moderate slowdown in the first half of the year, suggesting that macroeconomic controls have finally put the brakes on the torrid growth of the last three years, analysts say.
"China is heading for the softest of landings. There is no need to fear that China is heading for a 'hard landing'," said Julian Jessop, senior economist at Capital Economics in London. "Activity indicators remain firm, consumer spending is accelerating in real terms, and net exports continue to make a significant contribution to growth," said Jessop.
Like many economists, Jessop expects China's economy to have grown at around nine percent in the second quarter when official data is released Wednesday, showing only a mild slowdown from the 9.4 percent in the first quarter. Analysts said that evidence suggests a slowdown is taking hold nearly two years after the government stepped up its campaign against surging investment with a cocktail of administrative and monetary policies to cool overheated sectors within the economy. Purchasing manager indices compiled by the National Bureau of Statistics and by Hong Kong-based brokerage CLSA have both fallen to just above the line marking expansion from contraction, pointing to slowing economic activity.
Falling oil and raw materials demand, declining corporate profitability, easing foreign direct investment and cooling property prices are also adding to the growing pile of evidence pointing to a slowing economy. But slowdown does not equal recession, and analysts said there were enough projects in the pipeline - targeting deprived sectors such as transportation and energy - to ensure that investment, the economy's main driver, remains strong.
"The investment slowdown is taking place - it's not likely that there will be any kind of plunge," said Li Ruoyu, an economist with the State Information Center, a think tank under the State Council. Li said that she expects investment growth this year to come in above 20 percent, after growing at 26 percent in the first months of this year. Nonetheless, persistent concerns about the extremes with which China's economy contracts and expands have divided economists. Some fear that the investment frenzy of recent years has created massive overcapacity, which will eventually lead to collapsing profit margins and a return to the deflationary conditions of the late 1990s. In the most recent statement of the monetary policy committee, the group dropped earlier references to resurgent inflationary pressures and the threat of a rebound in inflation. Some argue that consumer price inflation, which grew at 1.8 percent in April and May, could slip into negative territory towards the end of the year as China's economic expansion burns itself out. Yu Yongding, an economist at the Chinese Academy of Social Sciences, was quoted by the official Financial News last week as saying that the economy is at a "turning point" and risks falling into deflation or even stagnation. Others are more sanguine, arguing that barring signs of overcapacity in those sectors of the economy which had been overheating, conditions remain in place for a gradual slowdown between now and 2007. "This is a situation that's not so negative and not so exciting - it's actually fairly dull," said Jonathan Anderson, head Asia economist at UBS in Hong Kong.
Anderson argued the economy would expand at over nine percent this year, in the eight percent range next year and around 7.5 percent in 2007. "It's not what you'd call 'Goldilocks' but it's as good as you're going to get in China," he said.
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