China’s growth rate: the dragon runs out of puff

15-2-11-dragon-634 — China is trapped between high debt and a strong yuan

Last year, China's growth rate slipped to a 24-year low of 7.4%. And it's heading lower still. "The litany of economic indicators flashing reasons for concern is growing longer," says the FT's John Authers. Chinese data isnotoriously unreliable, and many think growth has already slipped further. Diana Choyleva of Lombard Street Research reckons it fell to 5% last year.

Electricity output, an indicator that's hard to fake, has turned negative for the first time since 2009. January's monthly ISM survey, tracking activity in the manufacturing sector, fell below 50 for the first time since 2012. Inflation has fallen to a five-year low of 0.8%, while producer prices have taken another lurch downwards, implying further damage to firms' profit margins they declined by an annual 4.3% in January.

Imports slid by a fifth in dollar terms in January, further underlining the lack of momentum in the domestic economy. "Hot money" flows from short-term foreign investors also appear to have turned to outflows.

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All this is fuelling fears that the bursting of China's property and credit bubble could cause a deflationary, Japan-style slump. The financial system is looking increasingly ropey, according toJohn Ficenec in The Daily Telegraph. The bonds of Chinese real-estate companies "are falling like dominoes". And trouble in the Chinese property market could spread to other markets and banks overseas, just as subprime loans did.

The authorities have little room for manoeuvre. China is already up to its eyeballs in debt, which has reached 282% of GDP when all private and public borrowing is taken into account. Non-financial companies owe 125% of GDP, one of the highest levels of corporate debt in the world.

Reflating the bubble by loosening monetary policy too much would just raise the prospect of a worse crash later. But so far the small loosening measures designed to bolster liquidity and secure a soft landing seem to have had little cumulative impact.

Meanwhile, China can't count on exports to alleviate the impact of the domestic downturn, says Authers. It has allowed its currency to appreciate in recent years while other central banks have done the opposite, and has therefore lost competitiveness. The world's second-biggest economy has become yet another worry for global investors.