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Chinese Economy May Be Weakening Faster Than Thought

Chinese Economy May Be Weakening Faster Than Thought

Slowdown sparks scramble by Beijing to shore up China's growth.

Elaine Kurtenbach and Joe McDonald

SHANGHAI (AP) -- China's leaders are reversing their two-year effort to cool the economy, seeking to counter slowdowns in manufacturing and property that are dragging growth lower and threatening to spur unrest.

In the latest sign the world's No. 2 economy is weakening faster than thought, business surveys released Thursday showed manufacturing contracted in November for the first time in nearly three years.

That news came a day after Beijing moved to invigorate business activity by easing credit curbs, ending a long campaign to take some fizz out of rapidy expanding economy. China's leaders had resisted easing lending curbs out of fear that opening the spigots might revive an outright investment boom and re-ignite inflation.

High living costs are risky for China's communist leaders because they erode the economic gains that underpin the ruling party's claim to power. But slowing growth is another peril: already news of labor unrest at factories in the south suggests that workers are being squeezed as exporters juggle tight credit and slowing demand.

The decision by the People's Bank of China to reduce the amount of money that China's commercial lenders must hold in reserve by 0.5 percent of their deposits "is a clear signal that Beijing now sees the balance of risks as lying with growth rather than inflation," said Stephen Green, an economist with Standard Chartered in Shanghai.

The European debt crisis and feeble U.S. recovery have weakened demand in China's biggest export market, while at home efforts to curb inflation by cooling the property market are hurting a wide range of industries heavily dependent on housing and other construction.

The worsening conditions are no surprise to Chen Xiaoyan, a saleswoman at the Cangnan Qianku Qingfeng Pet Supplies Craft Factory in Wenzhou, a manufacturing base that has been hit especially hard by tight credit policies, leaving many factories short of operating cash.

"It was hard enough to do business last year. This year is the hardest," said Chen. "Our profit was 30 percent lower last year and it will be down another 10 percent this year," she said. Materials costs have come down in recent months, but labor costs have not, said Chen.

Worries over erring on the side of too fast growth are being overshadowed by greater alarm over a deeper slump as conditions worsen overseas.

"They're stuck," Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing said of China's policymakers.

That explains a comment by Vice Premier Wang Qishan to U.S. trade negotiators last week that "an unbalanced recovery is better than a balanced recession," he said.

The Chinese economy is one of the few still growing at a respectable pace, and Beijing's leaders intend to keep it that way.

China's economic growth eased to a still-robust 9.1 percent in the quarter ending in September from 9.5 the previous quarter. But indicators showing export industries and some other areas of the economy were cooling more sharply raised fears of job losses and possible unrest.

In the manufacturing sector, the activity gauge of the China Federation of Logistics and Purchasing fell an greater-than-expected 1.4 percentage points to 49 in November, well below the 50-level that signifies expansion. That was the first contraction in manufacturing activity since early 2009.

Another manufacturing survey by HSBC showed an even steeper decline, with its PMI dropping to 47.7 in November from 51.0 in October.

The property market also appears to have reached a turning point, at least in the biggest cities. New home sales fell 17 percent by transaction volume in China's top 20 cities in July-September compared with a year earlier.

Sharp discounts by some property developers have angered home buyers who bought when the market was at its peak, with some staging protests or storming real estate company offices.

"They promised us the price of our apartment would never go down, that it would only increase," complained Zhu Hongxia, a property owner in Shanghai who was standing with others outside the office of China Vanke, the country's biggest developer.

"You can't decrease the price suddenly by such a big amount," Zhu said.

While many homeowners have been angered by the drop, the government is seeking to prevent prices from surging further out of reach of most families. Leaders say property curbs will stay in place despite signs the effort to deflate the bubble is reverberating throughout an economy that already was slowing.

China is striving to shift its economy toward greater dependence on consumer demand, rather than construction investment and exports. But they remain key drivers in this developing economy, and the job-scarce U.S. recovery and Europe's recent upheavals do not bode well: export growth has fallen steadily since hitting a peak of nearly 36 percent in March.

China's monthly trade surplus with the 27-nation European Union fell 10.3 percent from a year earlier to $13 billion in October as countries that use the euro common currency struggle to contain a sovereign debt crisis.

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