China Slows Down; Falling Prices, Profits and Oil Demand Signal That the Breakneck Boom Is Shifting to a Safer Speed

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Byline: Melinda Liu (With Steve Glain in Washington, John Sparks in New York and Jonathan Ansfield in Beijing)

These days the word "slow" is not often paired in the same sentence with the famously roaring Chinese economy. Indeed, Beijing has been trying for two years to restrain the excesses of a country growing at the precipitous pace of 9.5 percent. Yet there are emerging signs that the campaign is starting to work. Inflation is slowing, particularly in go-go housing markets like Shanghai's, and for the steel that goes into so many of China's exports. Investment in roads and factories is cooling. When China's imports actually shrank in March, some economists predicted a drop in the growth rate, to as low as 7 percent. Analysts at RAND Corp. predict China will grow at a rate of 7 to 8 percent annually for the next five years. And Andy Xie of Morgan Stanley recently cited the "dramatic" slip in China's oil imports as one of the most visible signs that "the China slowdown has begun."

The impact on the world would depend, of course, on the scope of the slowdown. China has emerged as not only the export factory to the world but also the second most important consuming nation after the United States: Chinese consumption now accounts for about 16 percent of world growth. China is now the fastest-growing export market for Asian economies and commodity-producing nations such as Australia and Brazil, says Goldman Sachs economist Fred Hu, and "if China were to slow sharply, those countries would be hard hit." Hu thinks that's unlikely: the consensus forecast is for a growth slowdown of only three to seven tenths of a percentage point. Yet China is now such a big player, even symptoms of a slowdown can raise global tension: trade results released last week show that China's import growth is falling even as its export boom accelerates, boosting its trade surplus to a new high. That is going to complicate the efforts Beijing and the Bush administration are making to create a cordial atmosphere for Chinese President Hu Jintao's visit to Washington next month.

On balance most observers welcome evidence that China is retreating from a boom widely viewed as unsustainable. One of the most remarkable signs is the fall in China's demand for oil imports, which dropped 1.3 percent for crude and 21 percent for refined oil in the first half of this year. The price of oil hit a new record of $65.30 a barrel last week, but dipped after the International Energy Agency revised its estimate for the 2005 growth rate of China's oil demand from 7.9 percent down to 4.9 percent. Analysts say Beijing's campaign to boost power generation, most of it fueled by coal and other alternatives, could exert a restraining effect on oil prices. Whether that will happen is unclear, however. Oil markets, which had cited exploding Chinese demand as a major (if not the major) reason for record prices, keep finding new things to worry about.

Still, the sense is that China is making the right moves. Contrast, for example, China's apparently effective effort to reduce oil demand to the Bush administration's newly passed energy policy, which has done nothing to reduce U.S. demand. Consider, too, the contrasting approach to housing bubbles, which continue to loom in the United States as Washington watches from the laissez-faire sidelines, but are already shrinking in China, as Beijing slaps on rules to restrain lending and speculation. It's conceivable that if these trends end badly for the United States but well for China, other nations will begin looking more closely to Beijing-style state controls as a model.

As always, Beijing's concerns are mainly internal. …