Chinese economy experiencing downturn

November 1st, 2012

This year marks one of the first years where China has faced economic problems after decades of unmatched growth. China’s slowdown became more pronounced in late 2011 and early 2012, as exports and then inventories fell. If growth continues to weaken this year, the government is going to have to take action by speeding up the implementation of key infrastructure projects.

Fortunately, though, Chinese industrial companies’ profits rose in September for the first time in six months, adding to already- existing signs that economic growth is picking up following a slowdown. Bloomberg News suggests the worst is over for China’s growth slowdown. Factory production, retail sales and fixed-asset investment showed forecast gains in September, while industrial companies’ profits rose as well.

China’s construction equipment sector is slowly but surely digging itself out from under a mountain of inventory and will return to growth in the second or third quarter of next year as the economy recovers. The industry outlook has been negatively affected by huge stockpiles of unsold equipment after a four-year boom fueled by China’s massive stimulus program.

According to Bloomberg, policy makers across Asia have restrained their stimulus efforts compared with 2008-2009 as the global expansion slowed, either opting to preserve firepower should Europe’s crisis worsen, or seeking to avoid asset-price bubbles. In China, current Premier Wen Jiabao’s government has fought to rein in housing costs in the run-up to the nation’s once-in-a-decade leadership transition that starts next month.

Wen said the economy will keep showing “positive changes.” Actions that have currently taken place include the allocation of 97 percent of the year’s budgeted funds for infrastructure spending by China’s Finance Ministry at the  end of September. This money can physically be seen in railways as China boosted spending plans this year by about 25 percent to 516 billion yuan. The current state of the economy is a major concern for the Communist Party, as it begins a once-a-decade leadership transition set to start Nov. 8 in Beijing.

At this transition, Vice President Xi Jinping will replace current president Hu Jintao. Will Xi be able to control the economy while the poor and middle classes struggle? If the economy remains stable and Europe continues to hang on by a thin thread, then China should be able to see some growth in the coming quarters. But if the economy were to take a turn for the worse,  the future president will be entrusted to lead his country.