China's economy dips as property weakens

published 18 September 2014

China's economy is cooling unexpectedly fast. All of the data points to it: industrial production growth is growing at its slowest annual rate since 2009, electricity production fell in August for the first time in four years, and foreign direct investment is at a two-and-a-half-year low.

Meanwhile, property sales are down and prices have been falling for five months. The economy is now expected to miss its 7.5% GDP growth target for 2014.

In response, the People's Bank of China, the central bank, injected $81bn into the banking system in the form of three-month loans.

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What the commentators said

"The effect of China's real-estate slump is starting to spread," said Lingling Wei in The Wall Street Journal. Estimates suggest that around 25% of the economy is tied to the real-estate sector, with affected industries ranging from building materials to appliances.

"We're reaching a moment of truth," reckoned Shen Jianguang of Mizuho. The government will be worried that the property slump will turn into "an economy-wide crisis".

The property market was blown up by a credit bubble. When firms produce less, they have trouble servicing their debts, said John Foley on Breakingviews. Corporate bank loans have reached 95% of GDP. "Liquidity becomes precious when many borrowers aren't paying back loans on time." Hence the cash injection.

But as the facility only lasts for three months, it won't make much difference to lending and the economy. "For now the tone is of doing a little, saying less and changing almost nothing."

The government is walking a tightrope. It doesn't want to blow the credit bubble up any further, and wants to wean the economy off debt by encouraging consumption and deregulation.

To counter the slowdown, it has been using targeted measures, such as directing stimulus at specific sectors, such as railways and public housing. Still, if growth falls below a certain point, there could be a danger of social unrest, implying a wider stimulus, such as interest-rate cuts but then also a potentially bigger credit bust in the future.

"China's market Leninists'," said Ambrose Evans-Pritchard in The Daily Telegraph, "may find it just as difficult to deflate their housing bubble as Japanese and American capitalists before them."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.