China's Highflying Economy Shows Signs Of Cooling

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As China's economy overtakes Japan to become the world's second biggest, it's mostly written about in superlatives: the world's biggest consumer of energy, the biggest car market, even the biggest producer of beer.

But in fact, China's economy is in slowdown: Economic growth has dropped from almost 12 percent in the first quarter to 10.3 percent in the second and is slowing further still.

The dog days of summer are especially sluggish at a real estate agency in Tiantongyuan, a massive suburb of Beijing, once famous for its low-cost housing. But today, there are no takers. Real estate transactions dropped 70 percent after the government moved to slow the market in April. Prices have dropped by about a quarter in this part of town. Still, nobody is buying amid warnings the slump could be just beginning.

Ghost Cities

In real estate agent Meng Jianguo's company, which has 30 employees, the mood is quiet desperation. "From the end of April till now, this whole shop has only sold two flats," Meng said. "You see we're definitely losing money. Lots of other shops have closed down in this street."

Out on the street, it's not just vacant shops people are worrying about. China's electricity company recently estimated there were enough vacant apartments to house 200 million people. The government has denied these figures, but the phenomenon of ghost apartments — and even ghost cities — does exist because of real estate speculation.

The crackdown on that led to a slowdown in construction, and, says Wang Tao from UBS, that has had a knock-on effect on China's trade partners.

"When China slows, then its imports from other countries — and to a lesser extent, the U.S. — will slow, too," he said. "The slowdown of China's growth, the biggest impact of that, is going to be on commodity exporters: the Australias and Brazils and so on."

Woes In The Automotive Sector

China's massive stimulus package two years ago was accompanied by a record lending spree of $1.4 trillion. Now, stimulus incentives are being wound back, and once-favored sectors are coming back to earth with a bump.

In one dealership selling Chinese-made Chery cars, the four employees are playing cards. That's how slow it is. Growth in the auto market is slowing sharply. Shop manager Luo Cixi says sales have halved since last year.

"This year, profits are down a long way, since there are fewer customers," Luo says. "Last year, cars with small engines sold very well after the sales tax was halved. But after the tax was reimposed this year, it's been bad."

Chinese Consumers Not Spending Enough?

All of this suggests Chinese consumers aren't really stepping up to the plate. Domestic consumption is at 35 percent of gross domestic product, the lowest of any major economy. But minimum wages have gone up across China, mostly by more than 20 percent. That will raise prices for manufacturers.

Economists are not necessarily concerned, however.

"Most economists when they look at the slowdown that's taken place over the last couple of months, they're actually more relieved than concerned," says Patrick Chovanec from Tsinghua University.

Chovanec says China must now learn lessons from Japan's experience.

"Japan hit this point in the 1980s, when it became the second-largest economy in the world and the largest exporter in the world. And because it didn't adapt to the fact that it had outgrown its export-driven growth model, it lost its way," he says. "If China wants to continue to grow, it will have to transition from being an export-driven economy to an economy that drives itself."

That would be in China's long-term interests, but it would cause short-term pain. The same is true if Beijing frees up its currency, which it's accused of keeping artificially cheap. China has made symbolic moves to allow it to trade more freely, but it has been reluctant to let it rise too far for fear of a global double-dip recession. It's not yet clear whether China's policymakers have the stomach for that much short-term pain.

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