Chinese economy

Five reasons to be worried about the Chinese economy

Beijing watchers are growing concerned over the economic and political signals coming out of the world’s second-largest economy
Analysts are starting to worry about the Chinese economy.
 Analysts are starting to worry about the Chinese economy. Photograph: Ym Yik/EPA

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It has been a tough year for China. Premier Li Keqiang’s plan to have slower but better balanced growth has run into difficulties and Beijing’s struggle to transform its economic model has prompted fears that the world’s second-biggest economy could be the source of the next global downturn.
Here are five warning signs that have set seasoned China watchers worrying that what started out as an exercise in rebalancing and controlled liberalisation might result in a hard landing.

1. Growth

On the face of it, China has little to worry about. Official figures show that the economy is growing at an annual rate of 7%, the sort of expansion western nations can only dream about. But there are doubts about whether the official data is correct. The Economist has developed an unofficial “Keqiang index”, based on Li’s own technique of looking at indicators such as electricity use and rail freight volumes to assess what is really going on in the economy. These provide a much less rosy picture, with rail freight volumes down 11% on a year ago and electricity production flat. Using similar measures the London-based consultancy Fathom estimates China is really growing at 3.1% a year, not 7%.


2. Cutting interest rates

The cost of borrowing in China has been cut aggressively since the autumn of 2014 in response to the slowdown in the economy and the distress caused to property owners, local government and corporations by high debt-servicing costs. Tight monetary policy was one mechanism by which Beijing sought to slow the pace of growth amid concerns that its response to the global financial crash – cheaper credit and a fiscal boost worth 12% of GDP – had been excessive. The subsequent cut in benchmark interest rates from 6% to a record low of 4.85% suggests policymakers think the slowdown has been too rapid.

3. Putting a floor under the stockmarket

The ability to buy and sell shares was seen as an example of China’s growing financial maturity. But when the Shanghai Composite index fell by 30% in a month earlier this year, the government stepped in. The central bank supported share buying, a state-backed wealth fund bought up stocks and fund managers were prevailed on not to sell until the market had recovered. Far from restoring calm, the moves suggested Beijing was afraid of a damaging crash.

4. Declining exports

A move away from an over-dependence on exports is official government policy. But the recent weakness in the sale of goods overseas has been more marked than expected, and has helped to contribute to declining world trade and the drop in commodity prices. The cost of maintaining the yuan’s level against the US dollar has been a drop in foreign exchange reserves and an 8.3% drop in exports in the 12 months to July.

5. A cheaper currency

As a result of its weakening economy, China has abandoned its currency peg with the dollar and reduced the yuan’s exchange rate on three separate occasions this week. Beijing has put a brave face on this move, saying it is designed to get the yuan included in the International Monetary Fund’s reserve assets known as special drawing rights. A more obvious explanation is that China is seeking to boost growth by making its exports cheaper – a return to the growth model it is supposed to be abandoning.