Chi­nese econ­omy stum­bles again

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HONG KONG — Brightly hued men’s un­der­wear in a rain­bow of col­ors is no longer sell­ing well in Europe for the Zhong­tian Gar­ments Com­pany in Xi­a­men, China. Ex­ports are down 30 per­cent in the last year.

Chil­dren’s gui­tars with bod­ies re­sem­bling cats and cartoon char­ac­ters are los­ing their charm for Yue­sen Mu­si­cal In­stru­ment Fac­tory in cause of huge in­creases in lend­ing by Huainan, China. And at the Yuzhong­niao Out­door Prod­ucts Com­pany in Jin­jiang, do­mes­tic sales and ex­ports alike are de­clin­ing this year. The Can­ton Fair, China’s big­gest ex­port event, ended wit­few new or­ders. “We are not even get­ting many peo­ple brows­ing this time,” said Alice Hong, Yuzhong­niao’s sales man­ager.

Af­ter a pow­er­ful re­cov­ery through the au­tumn and win­ter from a V-shaped down­turn last sum­mer, China’s econ­omy is un­ex­pect­edly fal­ter­ing once again. Ex­ports are weak. The coun­try’s do­mes­tic econ­omy is still grow­ing mostly. That com­bi­na­tion has prompted grow­ing con­cerns among econ­o­mists and busi­ness ex­ec­u­tives about the sus­tain­abil­ity of even 7.5 per­cent growth in China in the com­ing years.

Louis Kuijs, an econ­o­mist in the Hong Kong of­fice of the Royal Bank of Scot­land, es­ti­mated that with the ex­clu­sion of over­in­voic­ing, ex­port growth came to only 5.7 per­cent.

Over the last few years, econ­o­mists have tended to pay less at­ten­tion to China’s ex­ports be­cause they were de­clin­ing as a share of the coun­try’s to­tal eco­nomic out­put, be­cause of weak over­seas de­mand. But newer re­search sug­gests that China may still be de­pen­dent on ex­ports.

The rea­son is that multi­na­tion­als have been rapidly lo­cal­iz­ing their pur­chases of var­i­ous items like com­puter chips and auto parts in China in­stead of im­port­ing them from other Asian neigh­bors. So while to­tal ex­ports may not have been ris­ing quickly in re­cent years in China, the Chi­nese con­tent in each dol­lar of ex­ports has been in­creas­ing.

Mr. Kuijs es­ti­mated that 20.7 per­cent of China’s eco­nomic out­put came from ex­ports last year, a fig­ure that had bot­tomed out in 2009 at 19.7 per­cent.

In a bad sign for ex­ports in the months ahead, the Can­ton Fair an­nounced that ex­port or­ders placed at this year’s spring ses­sion had fallen 1.4 per­cent from a year ago. It was the lat­est sign that steeply ris­ing bluecol­lar wages in China and a grad­u­ally ap­pre­ci­at­ing cur­rency are start­ing to erode the coun­try’s in­ter­na­tional com­pet­i­tive­ness; for­eign in­vest­ment in China has also be­gun to level off, while surg­ing in lower-wage coun­tries in the re­gion, like Cam­bo­dia and Viet­nam.

Li Yong, the gen­eral man­ager at Yue­sen Mu­si­cal, said that many Ja­panese, Tai­wanese and Korean com­pa­nies in his in­dus­try had re­cently moved to In­done­sia as costs climbed in China.

What has kept the econ­omy run­ning is the huge vol­ume of cash be­ing pumped into it. To­tal so­cial fi­nanc­ing — a mea­sure of all non­govern­ment bor­row­ing from banks, bond mar­kets, trusts and other sources — surged 58 per­cent in the first quar­ter of this year from the same pe­riod last year. Off­bal­ance-sheet fi­nanc­ing from the so-called shadow bank­ing sec­tor has been par­tic­u­larly ac­tive.

Lo­cal and re­gional gov­ern­ments have also been bor­row­ing heav­ily, as have spe­cial fi­nanc­ing units that many of them have set up. The cen­tral govern­ment is now try­ing to rein in this bor­row­ing, said Terry Gao, an as­so­ciate di­rec­tor of in­ter­na­tional pub­lic fi­nance at Fitch.

Bor­row­ing — by a range of lo­cal, re­gional and national govern­ment agen­cies as well as many state-owned en­ter­prises and some pri­vate busi­nesses — is in­creas­ingly a con­cern. While to­tal govern­ment and pri­vate sec­tor credit in China as a share of eco­nomic out­put is still lower than the United States or Ja­pan, it is ris­ing steeply. It has al­ready climbed to roughly 200 per­cent now from 120 per­cent in 2007.

The ef­fi­ciency of heavy lend­ing across the en­tire Chi­nese econ­omy has plum­meted, rais­ing worries about the sus­tain­abil­ity of Chi­nese credit-fu­eled growth. Through 2007, each dol­lar of ad­di­tional credit set off an ex­tra dol­lar of eco­nomic out­put. But now $3 to $4 of ex­tra credit is ex­tended be­fore the same in­crease in out­put takes place, an in­di­ca­tion that less eco­nom­i­cally vi­able roads, rail lines, busi­ness ex­pan­sions and other in­vest­ments are be­ing fi­nanced.

China’s cur­rent eco­nomic model, with its swift buildup of debt to stave off a steeper de­cline in eco­nomic growth rates, “can prob­a­bly go on for a while, cer­tainly through this year and into 2014, but the po­ten­tial fi­nan­cial stress in this is clearly go­ing to rise,” said Ge­orge Mag­nus, a se­nior eco­nomic ad­viser to UBS.

China is bor­row­ing al­most en­tirely in its own cur­rency. It also has vir­tu­ally no for­eign debt and a high sav­ings rate.

The coun­try’s grow­ing ranks of skep­tics are un­con­vinced by th­ese ar­gu­ments. “You could have this same con­ver­sa­tion about Ja­pan in 1989,” Mr. Mag­nus said. “The fact Ja­pan was a cred­i­tor coun­try with a lot of sav­ings did not stop a ma­jor bust from tak­ing place.”.

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