Is China Losing Steam?

Unlike the Chinese athletes’ stellar performance in the London Olympics, the Chinese economy showed lackluster activity over the past few months. For one thing, Chinese inflation has been subpar at 1.8% in July, not even half of the government’s 4% annual CPI target.

After slipping by four percentage points from its 2.2% reading in June, China’s annual inflation rate is currently at its lowest rate in two and a half years. Components of the report revealed that the 2.4% rise in food prices, which comprise nearly 70% of overall inflation, was barely enough to keep consumer price levels supported.

Other inflation reports, such as the producer price index, also posted less-than-stellar results. According to China’s National Bureau of Statistics, producer prices slumped by 2.9% in July, following the 2.1% decline seen in June. Bear in mind that lower producer costs are generally passed on to consumers, which means that there is further downside pressure on China’s CPI.

Retail sales for July also turned out to be a disappointment as the figure showed a 13.1% increase, weaker than the 13.7% growth seen during the previous month. Meanwhile, July industrial production fell short of expectations of a 9.8% expansion and clocked in a mere 9.5% increase.

You might be thinking, “Wait a minute. These results aren’t so bad! Other economies can only dream of economic figures like China’s!”

While it’s true that China isn’t exactly underperforming compared to the rest of the world, the Asian giant has set such an exceptional track record in the past that significantly weaker than usual figures tend to be alarming.

China's Economic Boom

This is probably why several economic hotshots believe that the People’s Bank of China (PBoC) needs to conduct further easing in order to bring China back to its glory days. Recall that the Chinese central bank already fired up its stimulus efforts lately when it cut interest rates by 0.31%, slashed its RRR by 0.25%, and offered 5 billion CNY worth of reverse repo agreements.

Apparently, the PBoC still needs to do a lot more than that in order to keep the Chinese economy afloat. With subdued inflationary pressures, there seems to be enough room for the PBoC to implement further easing. And with at least three monetary policy tools at their disposal, the PBoC probably wouldn’t pass up the opportunity to give the Chinese economy another strong boost.

However, monetary stimulus efforts can only do so much when it comes to supporting the domestic economy. China is still facing plenty of risks from the West, particularly from the slowdown in the U.S. and the financial crisis in the euro zone, putting a considerable drag on Chinese exports.

Fortunately, China has already taken some steps to rebalance its economy early this year as it expanded the yuan’s trading band. Not only does this level the playing field when it comes to international trade, it also makes China’s domestic economy a little more resilient amidst global headwinds. Two for the price of one! Now that’s a pretty sweet deal, don’t you think?

Thanks to their rebalancing efforts, China can still maintain its soft landing for now. But is this pace of growth good enough for the PBoC and the Chinese government? Probably not. That’s just like asking if five Olympic gold medals are good enough for China!

What will the PBoC’s next steps be? Let us know what you think by voting through the poll below!