BEIJING -- Even as China reported today a second year of annual growth above 11%, the prospect of a U.S.-led global economic slowdown looked likely to force a shift in priorities: from curbing the boom to sustaining momentum.
The government wants to generate 10 million urban jobs this year. Delivering that is likely to mean a sharper focus on the domestic economy, after a period when trade has been a big growth driver.
China's export engine started to slow near the end of the year, and the wider effects of that are already being felt. Economic growth peaked at 11.9% in the second quarter, then eased to 11.5% in the third. In the fourth quarter, the economy grew 11.2%, China's National Bureau of Statistics said today in Beijing. For all of 2007, gross domestic product expanded 11.4%, the bureau said.
Some exporters, seeing orders from the U.S. fall off, are planning to trim staff, which could feed into a broader impact on households and consumer spending. That is happening even as inflation in China remains high, and as drops in stock markets and property prices also threaten to erode savings.
"The economic and financial conditions at home and abroad will be more complicated in 2008, and China is facing tougher challenges in sustainable economic and financial development," Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, said this week.
Top leaders are now still focused on combating inflation that reached nearly 5% in 2007. They have resorted to freezes in prices of electricity and fuels, and price controls on some foods. That inflation's persistence limits the government's ability to lift the economy through measures like interest-rate cuts.
That could change quickly if inflation moderates and the U.S. and Europe continue to take a turn for the worse. "I think the government has already started to pay attention to the possibility of a U.S. recession," says Zuo Xiaolei, chief economist for China Galaxy Securities in Beijing. Though even the most pessimistic forecasts call for China's growth to ease to 9% or so this year, that would be a sharp relative slowdown. "They should stimulate domestic consumption to compensate for the loss of external demand," she says.
Indeed, Chinese authorities have a track record of responding aggressively to external economic slowdowns. In 1998, during the Asian financial crisis, a huge influx of government cash helped keep the economy growing by nearly 8%. Yet such efforts to boost the economy also carry the risk that China could end up in a damaging downturn when the boost runs out.
A boom in construction of housing, infrastructure and new factories has been the major driving force of China's expansion in recent years. Such investment has been so fast that many officials worry that more is being built than is really needed. To avoid excess capacity, the government has repeatedly moved to curb investment and warned that future growth will have to be less reliant on such spending. But those concerns may fall by the wayside if the leadership decides more infrastructure projects are needed to offset weaker exports.
"If the major economies do retrench fairly heavily, then maintaining a degree of growth that is consistent with social stability will require a boost in construction and investment," says Glenn Maguire, Asia economist for Societe Generale. A concrete increase in jobs could well outweigh the more abstract worry of excess capacity or wasted investment. So, he says, "We may see a temporary pause in this desire for more balanced growth."
There is plenty of such spending under way. China's Ministry of Railways earlier this month announced a major step-up in construction of new railroads this year, with official plans calling for spending about $41 billion to lay 7,820 kilometers of new track. And with China's cities growing by 18 million people a year, according to United Nations estimates, it wouldn't be difficult to speed up construction of housing and public works. About 10 major cities, including Beijing but also places like Chengdu, Wuhan and Guangzhou, are now building or expanding subway systems -- but there are several others whose plans are still waiting for approval.
Similarly, most analysts expect fewer of the tax and regulatory changes that were pushed through last year to limit exports of some products, mostly raw materials or those whose manufacture generates high pollution. Such measures were a response to the problems of the wide trade surplus, which had brought political friction with the U.S. and Europe, and flooded banks with cash they were ill-equipped to deploy properly.
Yet as the U.S. economy has weakened, official talk of curbing the trade surplus has subsided. Export growth slowed from about 29% in the first half of 2007 to around 22% in the second half, and the government is once again concerned about aiding exporters. "Companies' exports are facing new pressure ... the task of stabilizing exports is very heavy," Minister of Commerce Chen Deming said in a speech last week.
A mild global slowdown could actually ease some of China's recent economic problems: domestic food prices that are being pushed up in part by tight global agricultural markets, and a banking system flooded with cash from an ever-expanding trade surplus. Government think tanks are forecasting only a modest slowdown in economic growth this year, in the range of 10% to 11%, which is considered desirable given the strains that growth in excess of 11% has brought.
But a big shock to the export sector that leads to an increase in unemployment would be a different matter.
"Although the current slowdown in export growth helps alleviate the trade surplus and external imbalances, our nation still faces great employment pressures," argues Fan Caiyue, an economist for the National Development and Reform Commission, in an article this week. "We still need to maintain a certain amount of export growth, so if exports substantially decline, it is not beneficial to maintaining stable and fast growth in our nation's economy."
To reduce China's vulnerability to trade fluctuations and investment cycles, the government over the past couple of years also has been trying to encourage its consumers to spend more and save less. Yet while public-works projects can start up quickly, changing spending habits can take longer, and there hasn't yet been a big acceleration. After accounting for the effects of inflation, retail sales were up 12.8% last year through November, little changed from the 12.7% pace in 2006.
This year, officials are continuing to roll out policies designed to put more money in consumers' pockets, like higher minimum wages, and they are continuing to expand new health-care and social-security programs to reduce the burden of those costs.