Downturn continues to plague China

Shannon Roxborough | Oct 09, 2008 6:20am EDT | Comment

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News of the successful passage of the bailout plan notwithstanding, the Dow Jones Industrial Average plunged as much as 800 points Monday, setting yet another new record for a single-day point drop and dragging the index below the key psychological level of 10,000 for the first time since 2004. All other major indexes followed suit, dropping 7% or more, and falling U.S. markets sent global stocks spiraling, as European and Asian investors scurried to the relative safety of other investment vehicles.

The ongoing downturn continues to be a thorn in the side of the Chinese economy, which grew 10.1% in the second quarter, the fourth straight quarter that growth has slowed. Swiss bank UBS projects China's economy will grow a total of 9.6% this year, down from 11.9% in 2007. Slower economic growth and the global credit crunch are battering export markets and softening demand for real estate, which makes up 10% of China's gross domestic product.

The Chinese property market has fallen on hard times, with sales volumes and prices dropping precipitously since early this year. The Chinese government, which last month slashed interest rates to help counter the slump, could make a number of other moves to further prop up the sagging marketing. These moves could include further lowering interest rates, reducing down-payment requirements, lowering or eliminating land appreciation taxes and allowing home buyers to deduct mortgage payments against their personal income tax.

Bear in mind that while China's growth is slowing, its government still has a budget surplus and about $1.8 trillion in reserves with little public debt. If worse comes to worse on this side of the pond, say experts at TD Securities, a U.S. depression wouldn't necessarily spell economic disaster for China, since only 7% of its economic output is generated by exports to United States and American consumer spending has historically had very little effect on China's GDP. (A poignant example can be found during the American recession in 2001, when China's GDP soared while U.S. personal consumption growth slowed to 2% from around 5%).

In an effort to boost confidence and calm investors, Premier Web Jiabao said this week that the Chinese financial system is "safe and sound," and that while the U.S. subprime crisis is negatively impacting the global economy as a whole, China's economy "has maintained its momentum of smooth and rapid development."

Even so, the European Union's ban on all dairy-based Chinese imports aimed at infants and children, along with news that some tainted candy from China turned up in stores in California and Connecticut, have further dragged down exports and sales in an already hard-hit economy. In response to the broadening scandal, Chinese officials have begun dispatching over 5,000 inspectors to conduct round-the-clock tests at dairy factories to ensure that contaminated milk and other products don't reach consumers, the state news agency Xinhua reported Monday.

While Wall Street is sinking ever deeper into its worst crisis since World War II and a combination of factors continue to plague Chinese economy, rest assured Beijing will step up its efforts to sustain the nation's fast economic growth at all costs.