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Fed’s China remarks deepen worry over growth
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THE Federal Reserve chief’s rare comments on China reinforced unease its weakening economy might be headed for a deeper slump. But many experts still think fears of a China crisis are overblown.
The world’s second-largest economy has been stubbornly resistant to stimulus following five interest rate cuts since November. Growth in many industries is still decelerating. August exports and auto sales shrank.
On Thursday, US Federal Reserve chairwoman Janet Yellen mentioned China along with inflation after Fed governors put off a long-expected interest rate hike. Such concern is unusual for the Fed, which usually limits its focus to the US economy.
“The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect,” Yellen said.
Much of China’s slowdown is self-imposed as part of the government’s effort to replace a worn-out model based on trade and investment with more self-sustaining growth driven by domestic consumption.
“We are not expecting a hard landing, but clearly there is no sign that things are improving any time soon,” said economist Wei Li at Commonwealth Bank of Australia.
Many economists say fears of a Chinese collapse are not grounded in reality.
The main stock market index, despite a slump in prices in June, is up 40 percent from its level last year. Auto sales fell by 3.4 percent in August but Chinese drivers still bought 1.4 million cars, minivans and SUVs.
“GDP is still growing at a 7 percent rate, and that is not too shabby,” Carl B. Weinberg of High Frequency Economics said in a report. “People are not being thrown out of work en masse, as they are in southern Europe, by bone-crushing economic contraction.”
Abroad, weaker Chinese demand for iron ore from Australia and Brazil, copper from Chile and other industrial materials already has depressed global prices. Lower oil prices have pushed Canada into recession.
China also is the biggest trading partner for most of its Asian neighbors and weaker demand for industrial components has hurt suppliers in Japan, South Korea and Southeast Asia.
The impact on the United States, which relies less on trade, is expected to be more modest. Mark Zandi, chief economist at Moody’s Analytics, reckons that every 1-percentage-point drop in China’s economic growth strips 0.2 percentage points off US growth.
Chinese leaders, who say their growth target this year is “about 7 percent,” have tried to lower expectations without sparking panic.
Speaking last week, Premier Li Keqiang said the transition will be “painful and treacherous.” He tried to downplay the focus on the headline growth rate, saying Beijing will accept a slower expansion so long as it generates enough jobs and incomes rise.
“If there are signs the economy is sliding out of the proper range, we have the ability to deal with the situation,” Li said at the World Economic Forum in Dalian in Liaoning Province.
On Thursday, Yellen referred to “concerns about the deftness” of Chinese policy.
China still has room to stimulate growth by cutting interest rates or stepping up government spending, according to analysts. But that would be a retreat from the ruling party’s campaign to reduce reliance on state-led investment.
The premier and other officials have insisted that longer-term growth has to come not from stimulus but from opening more of the state-dominated economy to entrepreneurs.
A long-awaited reform plan issued on Sunday promises to overhaul state-owned companies that control industries from oil to banking to telecoms.
“A crisis is not necessarily a bad thing for China,” said Li at Commonwealth Bank of Australia. “It becomes a trigger of reform.”
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