Is China’s Economic Slowdown Here To Stay?

In a new sign of weakening growth, China’s biggest steel maker, Baosteel Group, said it has decided to shut down a mill in Shanghai to avoid mounting losses there amid weak demand for the steel plates that are used in shipbuilding and construction.

Thursday’s announcement by one of China’s most prominent and prosperous companies added to a drumbeat of bad news, including five straight months of declining profits at Chinese industrial companies and 11 consecutive months of contraction in the manufacturing sector.

Growth fell to a three-year low in the latest quarter, and officials, including President Hu Jintao, have warned it could fall further before rebounding.

While China’s central bank has twice cut the benchmark interest rates and the reserve requirement ratio, or RRR, for Chinese banks this year to buoy slowing economic growth, so far, the stimulus measures have not lifted the broader economy.

Economists now expect the third quarter to be the nadir, with full-year gross domestic product, or GDP, growth dropping below 8 percent for the first time since 1999.

Fitch Ratings, which is also calling for sub-8-percent growth for China, said Thursday it forecasts growth at 7.8 percent in 2012 and 8.2 percent in 2013, followed by 7.5 percent in 2014.

The main factors behind China’s economic slowdown have been the weakness of investment and export demand, and a widely held view is that policy loosening in China allied with improving global conditions will stimulate recovery over the next year or so.

But not everyone agrees.

“We believe this view misses the point that China’s slowdown is largely structural in nature,” Mark Williams, Chief Asia Economist at Capital Economics, wrote in a note to clients.

The strongest evidence is the strength of the labor market, Williams said.

The wages of migrant workers -- among the first to be laid off when conditions deteriorate – were up 13 percent year-over-year in the second quarter. Meanwhile, per capita urban disposable income increased 12 percent.

While the employment components of the manufacturing PMIs have been less positive -- both are currently below 50 -- the employment component of the services and non-manufacturing PMIs remain above 50.

Even though most of the available data are only for the second quarter and the labor market tends to reflect economic trends with a lag, the last quarter was the sixth in a row in which the economy slowed. In other words, if this were a cyclical downturn, it should have affected the labor market by now.

“A look at the experience of other fast-growing Asian economies underlines the point that it is the last few years of China’s growth that is exceptional, not the present,” Williams said, adding that a simple way to gauge how fast economies can grow is to look at how low per capita incomes are relative to those of the developed world.

Currently, per capita GDP in China is 11 percent of what it is in the U.S. That puts it roughly where Japan was in the mid-1950s. In the subsequent five years, Japan’s GDP grew 8 percent on average each year.

“Expectations for a strong and sustained rebound in China’s growth are likely to be disappointed,” Williams said.