China's economy at the crossroads

usa.chinadaily.com

It seems more evident than ever that the Chinese economy is at a critical crossroads, with inflation soaring to the highest level in three years while other economic indicators point to a slowdown in growth.

The latest economic data has created a dilemma for policymakers. They have to maintain sustained growth while taming feverish domestic prices. Inflation, fueled by surging food prices, hit 6.4 percent in June and could run out of control if the central bank loosens its monetary-tightening stance. However, the risk of an economic "hard landing" leaves Beijing with limited room for further policy maneuvering.

Government measures to contain inflation are beginning to have an impact on the country's economy. Manufacturing activity, gauged by the Purchasing Managers' Index (PMI), fell to 50.9 in June, its lowest level for more than two years. The same month saw import growth also decline unexpectedly to 19.3 percent year-on-year from 28.4 percent in May. Both of these data snapshots signal a weakened domestic economy.

A series of increases in the required reserve ratio for banks to a record 21.5 percent, added to repeated interest rate hikes, have also put many of the country's private enterprises on the verge of bankruptcy.

What is even more troubling is the country's massive amount of local government debt and the rising level of non-performing loans in the banking system.

Previous reports by some foreign media outlets said local governments have borrowed as much as 14 trillion yuan ($2.16 trillion).

China's central bank denied that figure in a statement on its website on Monday night. The People's Bank of China said that analysts were incorrect in deriving that 14 trillion yuan figure from recent central bank remarks that less than 30 percent of outstanding loans in the country went to local governments at the end of 2010. The ratio of borrowing by local governments to bank lending varies, with the highest not more than 30 percent, the statement said. The overall scale of local debt is therefore much smaller than reported, it said. [...]