China’s Economy Shows More Signs of Contraction

China’s imports fell for the seventh month, including a shortfall in exports. Experts expected a 10-percent fall in imports, but imports dropped 17.6 percent year-on-year.

China’s imports fell for the seventh month, including a shortfall in exports. Experts expected a 10-percent fall in imports, but imports dropped 17.6 percent year-on-year.

China is undergoing a stronger currency that hurts exporters, and drops in commodity prices are hurting the country’s growth potential. Exports fell 2.5 percent, which is a better than an expected turnout of 4.0 percent. The fall in imports is attributed to the trade surplus expanding to 65.6 percent year-on-year. Analysts believe imports will pick up shortly as the government cut tariffs on certain consumer items.

Manufacturing dropped in May as employers cut jobs and production, stemming from weaker international and domestic demand. In addition, various purchasing manager’s index (PMI) readings show slight improvement in the manufacturing sector, but the overall data indicates that manufacturing remains in trouble. Some analysts give credit to the government’s policy measures that are aimed at invigorating growth, but the improvements are short-term, and many economists believe the government should do more.

The government has already commenced various easing and spending measures to keep the economy out of free-fall. China has cut interest rates three times since late last year, including two reductions in banking cash reserves to foster lending. The government also approved over $40.8 billion in railway construction projects that support stimulus efforts. In terms of housing, authorities lowered down payments for second homes to create growth in the property sector, including a revision on a 20-percent capital gains tax requirement on second homes. What the government will do next remains in question.  Some economists in China expect two more interest rate cuts in 2015 and 2 additional bank reserve reductions.

China’s economy is not in a dire state, but the slower than expected growth is making many in the international community nervous because a great deal of the world economy hinges on Chinese growth. However, many are in for a disappointment as the government aims for slow and steady growth instead of the tremendous growth seen over the past 25 years. Chinese GDP expanded 7.4 percent last year, which was the poorest showing in 25 years, and GDP grew 7.0 percent in the first quarter, the worst performance in six years. The government projects the economy will grow in the area of 7.0 percent, but authorities embarked on a stimulus campaign in the past year to temper the slowdown. Officials are in the midst of transitioning the economy from a manufacturing-based system to one based on consumer participation. Economists expect to see growth pick-ups in the second and third quarters in the areas of investment and consumption.