China acts to reverse economic decline, QNB Group report says

RECENT production indicators in China have indicated further slowing in its economic growth. These negative signals are partly offset by an improvement in inflation and exports, according to QNB Group. China’s economic trajectory should become clearer in the next few months and could have a significant impact on the global economy and the GCC.

In just a decade, China’s economy has quadrupled in size, to become the world’s second largest, with GDP of nearly $6 trillion The real growth rate during this period has exceeded 10 percent.

Many factors have contributed to China’s remarkable rise. A series of economic reforms, starting in 1978, legalized private enterprise and attracted foreign investment into export industries. This provided a spark to growth, from a low base, that was then fed by domestic investment in infrastructure and real estate. This dynamic was supported by a demographic dividend, owing to a boom in the working age population and migration from rural to urban areas, supplying industries with cheap and plentiful labour.

However, such high growth rates cannot continue indefinitely. The key question is whether China will gradually ease to a more sustainable growth rate, driven more by consumption than investment, or face a sharper and disruptive deceleration. The later "hard landing" scenario, often described as a prolonged period of growth below 7 percent, is widely seen as one of the most serious risks facing a fragile global economy. GDP and Business Climate (2007-Q112)

China’s rate of GDP growth has been on the decline since a recent year-on-year peak of 12.1 percent in the first quarter of 2010. That was a result of government stimulus and monetary easing which enabled a sharp rebound from fall in exports due to the global crisis. By the first quarter of 2012, growth had fallen to 8.1 percent, the lowest rate in a decade, barring the first half of 2009. Of particular concern was the services sector, which grew at the slowest rate in over two decades.

There have been further signs of weakness from other indicators such as the official Purchasing Managers Index (PMI) which recorded 50.4 in May. – SG