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China is slowing. Its GDP growth rate has fallen to 8.1%. Not to worry. Forecasters everywhere are more than confident that the Chinese can stimulate the economy if things start to get bad. This might be true if China were a normal economy, but its strengths can quickly turn into weaknesses. The reality is that it has the wolf by the ears and there might be no way out.

In its latest forecast the World Bank has cut its outlook for China from 8.4% to 8.2%. While this growth rate seems enviable, it is a 13-year low. The Bank also forecasts that the Chinese economy after a soft landing will bounce back by the third quarter of 2012. The recovery's shape would be somewhere between a vigorous 'V' and a flat 'L'. The World Bank also forecast in June of 2008 that the United States would grow at 1.1%, Europe would grow at 1.9% and China would continue its growth of 9.4%. It also predicted in 2008 that a slowdown in the U.S. would have little effect on China. It was wrong, very, very wrong.

The World Bank's forecast has lots of support. A recent poll of 15 economists produced a median forecast of 8.3% while the Asian Development Bank (ADB) came in a little higher at 8.5%. Like the World Bank, the ADB's forecast has been lowered from its report in December.

But it is not just the economic boffins who are forecasting slower Chinese growth. There is evidence from the real world as well. The most telling has to do with commodities. Over the past two years commodities seemed tied to equities. This changed recently. World stock indices rose more than 11% in the first quarter while the Reuters-Jefferies CRB commodity index stalled, up only 0.2 %. This was reflected in Morgan Stanley's index of commodity producers whose shares lagged behind other sectors and gained only 4%. The sluggish growth was no doubt due to falling demand from China.

Real estate construction accounts for 13% of China's economic growth, but the sector is also slowing. Sales transactions in Beijing, Shanghai and Shenzhen are about 30% below levels last December. Investment in property construction growth was up 12% of the previous year in December, but that was half the growth in November. Developers have up to two years' worth of supply on their books and there are an estimated 10 million to 65 million unoccupied apartments in China.

Car sales are also slowing. In 2010 car sales exploded growing at 32%. They are still rising, but only at 4.5%. Dealers are now discounting to attract buyers. There is now concern that the annual forecast for 10% rise in sales will not materialize.

The slowdown in China is cause for concern far from its shores. One estimate puts Chinese contribution to global economic growth at two fifths, twice the contribution of the former locomotive, the United States. China has also replaced the U.S. as the dominate trading partner of an ever increasing number of countries. It makes up over 20% of exports of Taiwan, Australia, Korea and Japan. The impact of China's slowdown is not evenly spread. It contributes over 1% to the GDP of Russia, Korea, Indonesia and Brazil. Germany as well would be quick to feel a chill, since China contributes .8% to its GDP growth. In contrast the United States economy would hardly be affected. China takes only 7.6% of its exports and it contributes only 0.1% to its growth.

The main reason why the Chinese slowdown does not scare pundits more is that they expect China to repeat its past actions by loosening monetary policy and stimulating its economy as it did in 2009. Certainly it is trying. Bank lending in March rose to 1.01 trillion renminbi. This is high by even the more recent standards of the last two years and is two and a half times the amount of lending of last September and October. It is equal to a third of the entire amount of money lent in 2008 alone.

Not surprisingly inflation, which was considered tamed, has risen again by .2% from February and food prices are rising again despite record foreign purchases. It is not only inflation that is an issue. Most of the money lent by the state banking system goes to local governments. The most recent estimate is that about 10% will go bad by 2013.

So the Chinese have a problem. Their economy is slowing. Western economists feel that China has plenty of room for further stimulation, but that stimulation only results in more inflation and bad loans. As influential economist Tsinghua University Professor Yuan Gangming puts it "Monetary policy is already quite loose and the central bank won't loosen more unless it wants to die." Apparently it does.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: China's Falling GDP