China’s economy has been experiencing problems in the recent past. Roberts concludes that both the manufacturing and services sectors are affected, with a dip in consumer confidence. Cable says that the manufacturing sector has declined for the eighth consecutive month up to June 2012. Roberts reports that the HSBC/Markit index for the manufacturing sector fell 0.9 points in April, with the same reduction in the services sector index for May.
Economists give various reasons for this decline. Lardy states that the decline is due to a government-supported low-interest-rate policy, which causes a negative after-inflation return for savers who, to maintain their saving goals, save more, thus reducing local consumption. He further notes that the high growth of the Chinese economy is fueled mainly by a real estate bubble caused by a diversion of capital from bank savings, due to low-interest-rate earnings, to residential property, which has higher returns and prospects. He, therefore, predicts slower growth of the manufacturing sector if there is an oversupply of residential property. This would result from a reduced price due to the increase in supply thus lowering relative demand, pushing prices down. The reduced prices would mean fewer returns for the real estate industry, hence fewer investments and lower demand for construction inputs such as steel, cement, and copper. However, not everyone is of this view. Deng says that there is no real estate bubble in China, stating that the government is approving state projects which will see the manufacturing industry’s growth stabilize.
Lardy suggests that to avert the looming economic downturn, China must liberalize interest and exchange rates. This will boost local consumption, moderate investment, and reduce the external surplus. However, he says, vested interests are opposing these reforms. Johnson suggests that China is preventing a discussion on economic issues, with the state having control over major sectors of the economy. Since the beneficiaries of state control are Communist Party members with stakes in-state companies, it is unlikely that the reforms will be seen any time soon.
Works Cited
Cable, Jonathan. “Outlook darkens as Europe sinks, China struggles.” Yahoo News. Web. 2012.
Deng, Agnes. Interviewed by Rapoza, Kenneth. “What’s So Great About China?” Forbes.com. 2011. Web.
Johnson, Ian. “China Closes Window on Economic Debate, Protecting Dominance of State.” New York times. 2012. Web.
Lardy, Nicholas R. interviewed by Barboza, David. “Imbalances in China’s economy.” Economix Blog. New York Times. 2012. Web.
Roberts, Dexter. “Bad News Piles Up for China’s Economy.” Businessweek.com. 2012. Web.