China is facing a strong possibility of a slowdown in its economy. Recently, China reported that its official purchasing managers index (PMI) fell to 50.4 from 53.3 in April and stated that manufacturing activity grew at a much slower rate than expected in May. China's exports in April grew only 4.9% YOY, compared with export growth of 29.9% in April 2011 YOY. These developments, combined with other recent data showing weakness in industrial output, trade, and investment, confirm signs of trouble for the Chinese economy. Moreover, the Chinese economy is on track to grow at its slowest pace in a decade. As noted by Fareed Zakaria and Ruchir Sharma, these developments can be attributed, in large part, to the success of the Chinese economy. They point out that a slowdown in growth is a natural consequence of a period of strong economic expansion, as was the case with Japan in the 1970s.
Yet the Chinese government isn't acknowledging a slowdown without a fight. This is because, for now, the maintaining of significant growth in China's economy is its number one priority. The opiate of the Chinese masses is economic prosperity; as long as standards of living continue to grow, the majority of the Chinese population will accept the rule and policies of the Chinese Communist Party. Moreover, the Chinese government is currently in the midst of a huge transition of power in the Communist party, and there have been numerous cases, such as the fiasco surrounding Chen Guangcheng and the scandal surrounding Bo Xilai, of civil unrest. The last development the Chinese government needs is a slowing economy.
With this in mind, China's premier, Wen Jiabao, recently stated that "We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth." As noted by Yu Song, economist at Goldman Sachs, "this statement is his clearest expression of concern over the past half year. "On the heels of Wen Jiabao's announcement, the Chinese government appears to be significantly "fast-tracking infrastructure projects." Approvals for the infrastructure projects in the first four months of this year doubled YOY, while central government spending for the first four months soared 27% YOY. Credit Suisse is alsoforecasting infrastructure investment growth in China to accelerate from 9.6% last year to 14.3% this year, and possibly up to 20% this year depending on the aggressiveness of Chinese policies. Moreover, China has also announced in recent weeks it is allocating 66B Yuan to build affordable housing and 26.5B Yuan to subsidize energy-efficient appliance sales.
China is also keenly following developments in the European sovereign debt crisis, and is currently formulating contingency plans for a potential Greek exit from the Eurozone. The economic weakness of Eurozone countries such as Greece and Spain can significantly affect China; although trade with individual European countries is relatively small, the Eurozone as a whole is China's top trading partner. Moreover, 20% of China's foreign exchange reserves are held in euros and the weakness of the euro compared to the Yuan will raise the prices of Chinese exports to Europe and have negative consequences on China's exports.
China's stimulus policies are yet to be fully revealed. In fact, China has consistently downplayed speculation surrounding its response to the slowdown in not only its economy, but also the global economy. Zhang Yansheng, secretary-general of the academic committee of China's National Development and Reform Commission, has noted that "it would be unwise to overact" and stated that a colossal stimulus package wasn't necessary. However, it would be equally unwise for the Chinese government to downplay the effects of a slowing economy on its ability to govern the Chinese populace.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.