China’s economy is cooling. It can only mean bad news for the Asia-Pacific, and the global economy.


It’s the 1 trillion yuan question: has China’s economic bubble finally burst?

It’s an unnerving issue for the global economy, particularly at a time when the presumed leader in waiting, Xi Jinping, has apparently gone “missing in action” just a month ahead of the once-in-a-decade leadership transition at the 18th Party Congress.

After clocking up an average 10 percent annual growth rate for 30 years, this year’s forecast for the Chinese economy is 7.5 percent, its lowest expansion since 1990. In August, industrial output growth dropped to its lowest level since May 2009, imports dipped 2.6 percent and steel output is expected to contract this year for the first time in three decades.

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The recent 1 trillion yuan ($160 billion) infrastructure package announced by China’s top economic planning agency gave financial markets a brief bounce, but it was only a quarter of the amount spent in response to the global financial crisis. Among the 60 projects announced by the National Development and Reform Commission were urban rail, highway and water projects, yet little detail was released concerning their financing and the spending is expected to be spread out over a number of years.

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An economy described previously by Chinese President Hu Jintao as having a “lack of balance, co-ordination and sustainability” is still overly reliant on fixed asset investment, which accounts for half of GDP, as well as exports..

Writing in The Diplomat, Professor Minxin Pei has warned of the “mother of all debt bombs” threatening the health of the Chinese economy. In his September 10, 2012 article, he cites figures which show that local government debt may account for up to 50 percent of GDP (Beijing estimates a quarter), with potentially another 14 trillion yuan owed by risky local government financing vehicles.

Chinese banks continue to report low levels of non-performing loans, but Pei estimates up to 1 trillion yuan in potential losses from wealth management products, on top of bad debts hidden in the form of inter-bank loans, which represent nearly half the total amount outstanding.


Beijing’s enforced real estate contraction has hit developers as well as ordinary home buyers, with property prices slow to recover. Manufacturers are also struggling with excess capacity, while foreign luxury goods makers such as Burberry have reported a significant slump in sales.

The consequences of China’s slowdown are visible in its neighbors Japan and South Korea, which have seen their exports fall from reduced purchases of intermediate goods by Chinese factories.

While Chinese exports rose at a 2.7 percent annual rate in August, up from just 1 percent the previous month, it is difficult to see a full-scale recovery until U.S. and European consumers start opening their wallets.

In resource-rich Australia, the end of China’s boom means lower prices for coal and iron ore that had previously generated a windfall for both mining companies and the federal treasury. The iron ore price peaked in 2011 at nearly $200 a ton but it recently plunged below $90, forcing miners to slash costs and threatening the Australian government’s projected budget surplus.

For foreign exchange markets, any move by China to weaken its exchange rate may trigger retaliation from the United States, with the U.S. President wanting to be seen as being “tough on China” going into the November election.

Significantly, the absolute size of China’s working age population is expected to peak in 2015, bringing an end to its demographic dividend and threatening to make the Middle Kingdom grow old before it becomes rich.

Yet China still has the world’s largest foreign exchange reserves and a solid official fiscal position, along with a low official debt to GDP ratio at 17 percent. Its urban population is expected to grow by about 300 million over the next 25 years, providing a sustainable boost to domestic demand.

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At the end of the 1980s, Japan was forecast to overtake the U.S. and become the world’s top economy. Its unparalleled rise could not be halted, according to the experts at the time.

Is history repeating itself, or will China’s new leadership prove capable of defying the doomsayers?