XI’AN, China — A nationwide real estate downturn, stalling exports and declining consumer confidence have produced what a Chinese cabinet adviser, quoted on the official government Web site on Thursday, characterized as a “sharp slowdown in the economy.”
Though the Chinese economy continues to expand, construction workers are losing jobs in droves and retail sales grew last month at the slowest pace in more than three years. Investments in fixed assets have increased more slowly this year than in any year since 2001.
The most striking feature of the slowdown is that it extends beyond the coastal provinces, which depend on exports and are closely linked to the global economy, to the country’s far more insular interior, including cities like Xi’an here in northwestern China.
China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil.
A deepening slowdown would ripple across the world economy. Until now, China’s economy barreled ahead mostly unhindered as the main engine of global growth, even as Europe struggled with its government debt crisis and the United States limped along with a crippled housing market.
Government indexes show real estate prices are falling in more than half of the country’s top 70 urban markets, Xi’an among them. Standard & Poor’s Ratings Services and Moody’s each issued reports on Thursday warning that many of China’s real estate developers face a severe cash squeeze as apartment sales slow to a crawl. The developers still owe heavy interest payments on bank loans.
“Weak property developers in China are likely to face a test of their survival this year,” S.& P. said.
China’s economy was 8.1 percent larger in the first quarter of this year than a year earlier, but virtually all of that growth took place last year. The economy barely grew in the first quarter compared with the fourth quarter of 2011, and the second quarter of this year is likely to show even less growth from the preceding quarter, said Diana Choyleva, a China economist in the Hong Kong office of Lombard Street Research.
The World Bank also warned on Wednesday of a slowdown.
“Clearly the economy is much, much weaker than most people thought until recently,” Ms. Choyleva said. “They have a real mess on their hands.”
China is the world’s largest importer of a long list of commodities, like iron ore and copper. It has also been a big buyer of European factory equipment and luxury goods. The United States economy is much less exposed to a slowdown in the Chinese economy, with exports of goods to China representing less than 0.7 percent of American economic output last year.
Benefiting from heavy government spending on highways and other infrastructure and voracious demand for apartments as poor laborers arrived from the countryside, China’s inland cities had continued to expand even when the rest of the world’s economy fell into serious difficulty in late 2008 and early 2009. But now the economic troubles are evident here in Xi’an, an economic cornerstone of northwestern China that serves as one of the country’s largest transportation and distribution hubs and a manufacturing center for everything from bulldozers to aircraft components.
Sun Yufang, a wholesale dealer in Xi’an in ovens, ranges and water heaters, said that residents had nearly stopped outfitting new apartments or redecorating old ones.Video: From May 11: The great China slowdown (on this page)
“We didn’t really feel the global financial crisis, but this year, we’ve really felt it — I don’t see a solution unless people start buying,” Ms. Sun said, sitting in a spacious shop with no customers in sight.
Premier Wen Jiabao expressed concern last weekend about the economy after an inspection tour to Wuhan in east-central China. He then led a cabinet meeting on Wednesday that produced the government’s strongest statement yet.
The government should “place stabilizing growth in a more important position and carry out pre-emptive policy adjustments and fine-tuning more forcefully according to the changing situation,” the cabinet statement said.
An explanatory statement from the official Xinhua news agency drafted on Wednesday and posted on the Chinese government’s Web site on Thursday cited Zhang Liqun, a senior economist advising the cabinet, as saying that, “the sharp slowdown in the economy has aroused attention from policy makers.”
A preliminary reading of a monthly purchasing managers index showed that manufacturing had continued to weaken in May, with the index falling to 48.7 from 49.3 in April; a figure below 50 indicates a slowing sector.Video: From May 11: How to play China's economy (on this page)
The cabinet called for stimulating the economy through faster construction of railroads, schools, clinics and other infrastructure. With the Chinese economy still heavily dependent on investment spending, some economists are optimistic that China can quickly reignite growth.
“When you’ve got state banks lending to state enterprises to implement the state’s five-year plan, you don’t have a lot of downside to investment,” said Paul Gruenwald, a former International Monetary Fund official in Hong Kong who is now the chief Asia economist at ANZ, one of Australia’s biggest banks.
'Never seen it as bad'
China has the financial resources to expand government spending sharply. China has a low ratio of debt to economic output, even when sizable local government debts are added to the national debt. Chinese banks have among the world’s lowest rates of loans to deposits, although some banking analysts have questioned whether many loans by state-owned banks to politically influential borrowers will be repaid.
But with the country having finished building much of its infrastructure, it is having a harder time finding further projects that can pass cost-benefit analyses. The Chinese interior has been the biggest beneficiary of infrastructure spending over the last decade, but now shows signs of catching up with the more developed coast.
The Xi’an airport opened a third terminal and another runway on May 3, giving it the capacity to handle as many passengers as John F. Kennedy International Airport in New York, despite considerably smaller daily traffic. Bullet trains connect Xi’an to Zhengzhou, nearly 300 miles to the east, while no fewer than three concentric beltways encircle Xi’an, although traffic jams continue to bedevil the ancient city’s core.Video: China focuses on airlines, airports to help its growth (on this page)
One more big infrastructure project remains: the city opened its first subway line late last year, plans to finish a second line later this year and has begun construction on a third. But crisscross the city these days and there are fewer streets torn up for building projects than in the past.
At the same time, residential real estate construction has slowed sharply after the government imposed a stringent ban last year on the purchase of multiple homes in an effort to discourage speculation and make housing more affordable. Wei Li, a real estate broker in downtown Xi’an, said that prices had fallen 20 percent since the start of this year for new apartments in the hundreds of towers under construction on the city’s periphery, but she said downtown real estate prices were stable. Construction material vendors here, however, say that apartment prices are also falling in downtown neighborhoods.
Developers across the country have responded to the drop in prices by abandoning the longstanding practice of floodlighting construction sites and working around the clock. They have cut back to one daytime shift, sharply reducing the demand for construction workers.
“It’s getting harder and harder to find work,” complained Li Bo, a construction worker here.
Xi’an is best known in the West as an ancient capital of China, a Silk Road entrepôt that is home to the terra-cotta warriors. But modern-day Xi’an also plays an important role in the Chinese economy as a regional economic hub with eight million residents.
Store owners and other traders from across northwestern China converge at large covered markets here to buy goods, making Xi’an one of the best places to take the pulse of China’s interior. And now, that pulse feels weak for consumer spending.Video: Murder and corruption scandal rocks China (on this page)
Until late March, Ma Xiechuan sold pork at his butcher shop here by hacking large chunks and handing them to lines of customers to take home and carefully slice and dice. But with sales now down by a third, he has so much extra time that he deftly wields his steel cleaver to produce thin slivers, ready for the customer’s wok.
“It’s the fastest downturn in business I’ve seen in more than 10 years here,” Mr. Ma said.
Yian Leilei, a wholesaler of tablecloths and car seat covers, said that sales nose-dived after Chinese New Year on Jan. 23 and had not recovered. Wang Heiyen, a wholesaler of insulated food and beverage containers said his sales were sliding steadily and customers were becoming ever pickier. Ding Lei, the co-owner of a paint and plaster store said his sales had halved since the start of this year. “People are just not buying apartments,” Mr. Ding said. “It was O.K. in 2009. I’ve never seen it as bad as it is now.”
Mayor Dong Jun of Xi’an expressed worry in a post last week on the city’s Web site.
“The economic situation in the whole city from January through April this year is not that optimistic,” he said. “Maintaining the growth rate continues to be very difficult.”
This story, "After Barreling Ahead in Recession, China Finally Slows", originally appeared in The New York Times.
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