China’s Economy Lags Behind Past SuperSonic Growth

By TJ Kim

September 11, 2012

With no clear signs of recovery from the global recession, China continues to list itself among those with slowing economies.

China’s CPI inflation rebounded to 2.0% on a year on year basis. However the headline CPI inflation growth largely owes to the weak supply of food commodities due to the bad harvest year. Citi Economics Research team wrote in China Macro Flash,

“Both MOC and NBS interim data indicated much higher food inflation than the official numbers do. Food prices rose 1.5% MoM, and YoY inflation increased sharply from 2.4% in Jul to 3.4% in Aug. Vegetable prices jumped 14.3% MoM and 23.8% YoY, contributing most to higher inflation…”

Due to weak domestic economic activities, industrial production has been sluggish while inventory is depleting at an accelerating rate. Though infrastructure investments appear to maintain the industrial activity level, the private sector demonstrates tepid economic activities.

“Steel production growth fell sharply, possibly due to still high steel inventory. Cement production accelerated, likely reflecting increased demand as infrastructure investment picked up speed.”

On the Fixed Asset Investment Side, the growth seems to be stabilized, reaping the benefits from infrastructure investment as well.

“…FAI growth in real terms may have been stable or accelerated slightly. Investment in railway dropped by 23.9% YoY during Jan-Aug, a marked improvement relative to a decline of 31.9% YoY in Jan-Jul, reflecting supportive policies to develop the national railway network.”

China’s economy may remain on the soft patch in the near future as the major global economic players still struggle to find a way out of the recession that started 3 years ago. Until then, the largest exporter will face some slack in economic activities, especially in manufacturing. As a result, the already slowing employment condition may worsen over the next few months, which would consequently depress consumption nationwide. In order to avoid this spiral, Chinese government may need to stimulate the economy with fiscal accommodation that will ultimately expand its middle class, fostering domestic consumption.

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