China heads for a hard landing

"The Golden Years have shuddered to a dramatic halt," said Stephen Green of Standard Chartered. China's economy, which has expanded 69-fold since free-market reforms began in the late 1970s, is cooling rapidly, with the World Bank pencilling in GDP growth of 7.5% next year the lowest in almost 20 years and some analysts expecting far worse.

Beijing is clearly rattled. The minister of human resources and social security said the employment outlook is "grim". Last week, China slashed interest rates by just over 1%, the steepest cut in a decade. It recently announced a $586bn stimulus package and another, aimed at bolstering consumption rather than infrastructure spending, is on the way.

Chinese economy: housing and exports on the slide

The authorities have their work cut out. The property sector, which accounts for a quarter of investment, is ailing, with house prices in Shanghai down 19.5% in the third quarter. Construction is set to shrink by 30% next year and that sort of weakness in the property market will eclipse any extra government spending on infrastructure, said Paul Cavey of Macquarie Securities.

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The sickly world economy has also begun to take its toll on exports, which account for 40% of GDP. The contraction in the manufacturing sector is deepening, with the PMI survey at the lowest level in its four-year history; weak overseas demand, rather than the domestic slowdown, is now the key problem, said Eric Fishwick of CLSA. Two-thirds of the factories making toys for export closed in the first nine months, said Michael Sheridan in The Sunday Times, while official data indicate that growth in export-orientated Guandong province, which accounted for 12% of GDP last year, has fallen by 33%. There have already been clashes between newly jobless workers and police in the city of Dongguan.

Chinese economy: will consumption rise?

The government is hoping consumers will spend more (they account for about 37% of GDP) and thus cushion the decline, but bolstering consumption "is a gradual process. It cannot immediately become an economic engine," said independent economist Andy Xie. Households' main concerns at present are tumbling stock and real-estate markets and rising unemployment, noted Dexter Roberts in BusinessWeek, which helps explain why the Chinese car market is expected to shrink next year. Capital Economics pointed out that the latest rate cut will further depress household incomes, as the real return on deposits has been negative since last year. Longer-term, only an improved social welfare system will persuade the Chinese that their savings rate (25% of their income) is too high, said Xie. Given all this, Jim Walker of Asianomics now thinks China is likely to grow by 0%-4% next year, and there is a 30% chance of its economy shrinking. We can expect to hear a great deal more about a "hard landing" in China in 2009.