The Chinese government is attempting to calm the country’s overheated property market. Goaded by measures such as ownership restrictions on property and taxes, home prices declined in big cities in November. But this is also a tell-tale sign of China’s flagging growth. China’s Central Bank had recently lowered the cash reserve ratio to help commercial banks push lending and revive the economy.
Last month, the World Bank identified four major risks to China’s financial markets in its Financial Sector assessment. Two of these were disintermediation or lending outside the formal banking sector and high real estate and commodity prices. Non-formal lending is partly to blame for the real estate asset bubble.
The second largest economy in the world after the US, China is projected to grow at 8.8% in 2012, but less than 9.3% in 2011. The Asian Development Bank had earlier projected a growth rate of 9.1% for 2012. China had grown at 9.7% since Deng Xiaoping’s market reforms began in 1978-79. Growth accelerated to 11% during 2003-07. Between 2008 and 2009, the average GDP growth was 9.4%. In 2010, China grew by 10.3%.
In recent times, the Asian powerhouse’s economic activity has been fragile. The Purchase Managers Index (PMI) of HSBC Holdings Plc (HBC) for China’s Services sector fell to 52.5 in November from 54.1 in October – the slowest in three months.
China’s official PMI for the non-manufacturing sector touched 49.7 in November, significantly below 57.7 recorded in October according to the China Federation of Logistics and Purchasing. The country’s official manufacturing index declined to 49.0 in November from 50.4 in October.
Asian economies, such as China, largely rely on export robustness for growth. China has had to face a rather soft external demand environment primarily due to the debt crisis and economic sluggishness in the west. Inflation ensuing from high food and commodity prices has required tougher monetary measures.
China is re-orienting its growth model from being export-driven (and with a large current account surplus) to domestic demand-focused. But it also faces the unenviable task of easing monetary stringency to encourage credit and economic growth along with addressing the overheated real estate sector to put its economy on an even keel.
