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After slamming brakes on growth, China reaches for stimulus

Industrial production, imports and exports show signs of a slowdown. The deceleration is being felt in the U.S., especially Southern California.

May 15, 2012|By David Pierson, Los Angeles Times
  • The Yangshan deep-water port in Shanghai. After hitting the brakes on growth, China now may be reaching for stimulus to spur lending. A sharp downtown would be a blow to the global economy.
The Yangshan deep-water port in Shanghai. After hitting the brakes on growth,… (Qilai Shen, European Pressphoto…)

BEIJING — After months of careful tinkering aimed at slowing China's supercharged economy, Chinese officials may have gotten more than they bargained for: The nation's economic engine is decelerating with alarming speed.

Industrial production in April hit its slowest pace in more than three years, while growth in exports sputtered and imports were flat.

In response, China's central bank over the weekend said it would ease reserve requirements for the nation's banks. The move frees about $70 billion for lending to stimulate the economy. But some economists said more aggressive action was required to keep China from a hard landing.

A sharp downturn in China would be a blow for the global economy and in particular California, which has long been a beneficiary of booming trade with China.

The deceleration is already being felt at Southern California ports. In the first three months of this year, container traffic through the ports of Los Angeles and Long Beach was up just 0.6% compared with the first quarter of 2011, largely because of slowing shipments from China.

Growth in exports is weakening as well. China is now California's third-largest export market, behind Mexico and Canada, snapping up a record $14.2 billion of computers, wine, citrus and other products last year. But California exports to the Middle Kingdom barely budged in the first quarter, up only 0.4% from the first three months of 2011.

Ross DeVol, chief research officer at the Santa Monica-based Milken Institute, said California would weather a soft landing by China just fine. "But it all depends on how much China's economy will slow," he said.

Elsewhere in the U.S., American companies are already experiencing China's weakness in their financial results. Slowing construction in China contributed to a disappointing first quarter for heavy machinery maker Caterpillar Inc. Auto manufacturers including General Motors Co. and Ford Motor Co. are revising once-lofty expectations.

Wang Tao, a China economist for UBS, has downgraded her forecast for gross domestic product growth in the second quarter to 8% from 8.4% compared with the same period last year. That's after 8.1% year-over-year growth in the first quarter, the slowest pace of expansion in three years.

"With export growth still in decline and downside risk in Europe and the global economy remaining, we now think the government may want to ease credit and fiscal policy further to support growth," Wang said in a recent research report with the headline "This is not good."

If this all sounds familiar, it's because China responded to the 2008 financial crisis with a massive stimulus program. A wave of bank lending and government spending on infrastructure helped power the economy through the downturn.

But China is still living with the fallout. Easy credit stoked inflation, created a worrisome real estate bubble and encouraged local governments to take on mountains of debt. In a bid to cool the economy, Chinese officials imposed new restrictions on real estate purchases, toughened lending standards and boosted banks' reserve requirements.

Economists said any new stimulus would have to be targeted to reach those who need it most and kept out of the hands of speculators.

Complicating the matter is the upcoming transition of China's top leadership, a once-in-a-decade hand-over of power that will take place this year.

Stability is paramount during the event, especially now that the ruling Communist Party has been rocked by the Bo Xilai political scandal. That boosts the odds that Beijing will turn to a stimulus if needed, even if it further distorts China's imbalances down the road.

"There's a strong inclination to reflate the economy, but that's probably the worst thing they could do," said Patrick Chovanec, an economist at Tsinghua University in Beijing.

The return to a massive government-led stimulus would only reinforce the imbalances in China's economy. Reliance on exports and big-ticket infrastructure projects has turned China into a nation that produces too much and consumes too little.

At the same time, China's real estate market, a major driver of growth after the financial crisis, remains in a deep freeze because of buying restrictions aimed at lowering prices even further.

"It would be like pushing on a string," Chovanec said of another round of stimulus. "People are convinced there will be a soft landing instead of a hard landing and rebalancing would take place easily without discomfort. What we're seeing is that's not the case."

david.pierson@latimes.com

Times staff writer Ricardo Lopez contributed to this report.

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