Issue of the week: Worries over China’s economy

The Chinese economy suddenly looks vulnerable, said Damian Grammaticas in BBC​News.com. The country’s massive manufacturing sector contracted in November for the first time in three years. The decline stems largely from troubles in the euro zone and the U.S., China’s two biggest export markets, but domestic orders also fell, suggesting that the home market won’t be able to “pick up the slack” of continued woes overseas. That’s not the only new evidence that the country’s “situation is particularly worrisome,” said Jeff Cox in CNBC.com. In a surprise move, the People’s Bank of China loosened rules to encourage more bank lending. China’s leaders had been tightening bank lending to tamp down inflation created by the country’s property bubble, but the central bank’s new tack suggests that keeping the economy growing is now the greater concern.

The bank’s move won’t be enough “to avoid the bust that is coming,” said The Wall Street Journal in an editorial. Inflation, officially 5.5 percent, may really be closer to 10 percent, and loan defaults are on the rise. China is now suffering “the hangover” from the biggest stimulus program in history; the government’s profligate spending has led to “ghost cities of empty apartment blocks, unsafe high-speed rail lines, and crumbling highways to nowhere.” Its attempt to “put the economy on steroids” also fueled the unsustainable property boom, said Martin Walker in UPI.com. Prices for previously owned apartments in Beijing, Shenzhen, and Tianjin have fallen to record lows, and sales of new housing in 30 cities fell 42 percent between October 2010 and October 2011. It’s hard to see this ending well: Either new bank lending will push prices up and reinflate a dangerous property bubble, or housing prices will continue to tumble and spill into a banking crisis, with billions of dollars in property loans going sour.

Don’t count China out, said Steven Rattner in The New York Times. Despite its challenges, the country “will continue to be the world’s greatest machine for economic expansion.” China’s big strength—“high labor efficiency with wages that remain extraordinarily low”—is bound to keep its manufacturing sector humming, while its property bubble is “far short of what brought down the American economy.” And remember that Chinese government debt, while high, was incurred not from consumption but from investment, which is “far better for longer-term growth.” This is a country that “pulses with energy and success,” and “I am betting on its continued success.”

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