China's growth slowing fast

For entrepreneur Wang Wei Qi, China's hopes of shifting its economy away from its heavy dependence on exports are still a dream rather than a reality.

During the financial crisis last year his company had to focus its business on Chinese buyers. Orders and profits fell sharply.

Now, the Shanghai Caiyuan Textile Co. Ltd. is enjoying a rebound in sales thanks to the return of overseas customers.

"It all depends on the money in the foreigners' pocket," Mr. Wang explains. "China has not walked out of the shadow of the financial crisis. The world economy has not recovered yet."

Indeed, fresh data released Tuesday show China's economy, the pacesetter for the global rebound, is slowing faster than expected. Retail sales, industrial production, new loans and imports were all weaker than forecasts, while inflation, spurred by a 6.8-per-cent rise in food prices, jumped to 3.3 per cent.

At the same time, the Asian superpower's trade surplus widened to its highest level in a year-and-a-half, exacerbating concerns about unhealthy global trade imbalances and reigniting calls by U.S. politicians for Beijing to further strengthen its currency.

"With weaker domestic demand data and higher food price inflation, the pressure on China to accelerate the pace of Chinese yuan appreciation is building," BNP Paribas currency strategists said in a note.

China's trade surplus for July surged to $28.7-billion (U.S.) from $20.02-billion in June, surprising economists who were forecasting a $19.6-billion surplus. Data released by the U.S. Commerce Department showed the U.S. trade deficit jumped by 18.8 per cent in July to $49.9-billion.

The disappointing economic indicators underscore the fragility of the global recovery. The figures also show that harmful global imbalances, namely China's heavy reliance on foreign demand for its goods and the United States' continued addiction to cheap goods made in China, are far from being solved.

Spurred by stimulus spending on infrastructure that spiked demand for raw materials such as coal and oil from resource-rich countries like Canada, China's GDP surged 11.9 per cent in the first quarter of the year. GDP growth slipped to 10.3 per cent in the second quarter and is now expected to moderate further in the third quarter as government measures to cool an overheated property market take hold.

Still, most economists are predicting a soft landing, rather than a crash, for the Chinese economy.

"Chinese growth is easing from the fast pace set at the start of the year, but the main activity indicators so far point to a moderate slowdown rather than a sharp downturn," Brian Jackson, a Hong Kong based strategist with RBC Dominion Securities, said in a note to clients.

Despite the slowdown, China's policy makers cannot afford to forget about inflation, Mr. Jackson warned. Several factors, including large wage increases for migrant factory workers and continued loose lending conditions, could push inflation higher in the next few months, he said.

In June, just a week before the G20 meeting in Toronto, China pledged to give the yuan more room to appreciate, ending a two-year peg to the U.S. dollar. However, the yuan has risen only 0.77 per cent against the greenback since the announcement.

Higher inflation would bolster the case for a stronger yuan, as it would cool the economy and reduce China's trade surplus by moderating the cost advantage of the country's exporters. It would also boost the purchasing power of Chinese consumers for imported goods.

"The People's Bank of China clearly favours a stronger Chinese yuan, and this week's data will likely help it persuade the key decision-makers in the State Council and Politburo that such a move would not only reduce the potential for trade tensions but is also appropriate for addressing domestic conditions," Mr. Jackson said.

Back in his company's showroom, Mr. Wang remains skeptical about the notion that the domestic market will ever be the main buyers of the colourful textiles that hang from the wall.

"Offshore orders are much larger than domestic ones," he says. "The Chinese market is big, but it can't be as big as the rest of the world market."