A Chinese shopper checks the prices of UHT milk at a supermarket in Hefei, central China's Anhui province.AFP
Cracks are appearing in the Chinese economy, raising fears that the key driver of the global economic recovery is starting to falter.
As the fastest-growing major economy, China has been instrumental in pulling the world out of recession. The potential for slower expansion in China comes as fallout from the European debt crisis threatens to derail the continent's recovery, creating new worries for investors hoping a fragile global rebound will solidify.
Global markets have already been rattled by emergency measures in Europe to rescue Greece from a financial meltdown, along with broad spending cutbacks in various European countries needed to bring ballooning deficits under control. Now fears are intensifying that moves in China to control price gains and keep a real-estate bubble from forming will slow the world's fastest-growing major economy, adding another hurdle for the global rebound.
Two reports Monday indicated that China's expansion - which came in at a whopping 8.7 per cent last year and 11.9 per cent on an annual basis in the first quarter of 2010 - may have peaked.
Read about the warning signs of slowing growth
The New York-based Conference Board, a business research organization, warned that despite a 1.1-per-cent gain in March, its leading economic indicator index for China is "unlikely to accelerate further through the summer months." The group said the March increase was likely due to developers in China front-loading projects ahead of real-estate controls that were implemented by the Chinese government last month.
UBS Securities, meanwhile, issued a note to clients declaring that "China's trade is weakening," as imports of commodities including copper are starting to decline now that China's government is tightening business lending and winding down a $585-billion (U.S.) economic stimulus package.
The reports contributed to concern that Chinese demand for commodities will be eroded in the next few months, which in turn spurred heavy selling of commodities and shares of natural resources companies. Oil hit its lowest point of the year, falling below $70 (U.S.) a barrel before settling slightly above that mark. Copper prices sank more than 6 per cent to the lowest level in 15 months, while other metals fell sharply. The resource-heavy TSX composite index dropped 1.7 per cent. China's benchmark Shanghai stock index sank more than 5 per cent.
"Resources' equity-commodity markets are spooked by macro-restraints on China's economic growth, Eurozone's debt issues," and Australia's plans to institute a major tax on mining firms, the UBS report said.
Beijing-based research firm GaveKal Dragonomics also warned Monday that dramatic shifts are looming in China's building sector, a major driver of demand for Canadian metals and lumber.
"After growing by an impressive 32 per cent between January and April, GaveKal expects construction in China will face an astounding 27 per cent decline in construction volumes during the months of May to December," GaveKal said. "Once the deceleration in domestic construction demand takes hold, expect a downward correction in commodity prices."
The Asian giant's main stock index began to sink last week to its lowest level in more than a year, after Premier Wen Jiabao declared the government would act "decisively" to tame the real-estate market, while the Ministry of Commerce said the euro's plunge is making life harder for Chinese exporters.
China has already initiated steps to tighten its monetary policy, mainly by ordering banks to raise their reserve requirements in a bid to pour cold water on property speculators. The country is also expected to raise interest rates eventually and allow its currency to appreciate, which would add more headwinds to its economy and exports.
The worries about China come as a major Canadian trade mission is in Shanghai, where the premiers of Canada's three westernmost provinces were touting a new partnership aimed at boosting trade and business with Asia. Stockwell Day, President of the Treasury Board and Minister for the Asia-Pacific Gateway, also is in Beijing Tuesday.
"You can not put too many eggs in any one basket," said Saskatchewan Premier Brad Wall, who was in Shanghai as well as Beijing Monday to promote his province's uranium, potash and agricultural wealth. "We have a great story to tell and lots of opportunities to offer."
Mr. Wall was joined by Alberta Premier Ed Stelmach and British Columbia Premier Gordon Campbell, who together were pushing the "new west partnership" economic agreement that they signed earlier this month. As part of that three-way pact, the leaders opened a joint trade office in Shanghai.
Canada's Western provinces have been particularly attractive to China and other rapidly growing Asian nations because of their rich resources. Companies producing oil in Alberta, potash in Saskatchewan and wood and coal in B.C. have all benefited from China's strong economic growth, which could still top 10 per cent this year.
Macquarie Securities Ltd., however, said earlier this month that efforts to tame the real-estate market could put the country's 8-per-cent annual growth target at risk.
With files from Brenda Bouw and Bloomberg