China's economic growth has slowed significantly in recent quarters according to several indicators, causing concern for the global economy. In response, China has cut interest rates and implemented subsidies to boost consumption. While exports have exceeded expectations, continued weakness in other areas risks a "hard landing" of growth below 7%. As China is an important trade partner, its economic trajectory over the coming months could significantly impact the GCC region and global economy.

1. QNB Economics
economics@qnb.com.qa
17 June 2012
China acts to reverse economic slowdown
Recent production indicators in China have Source: National Bureau of Statistics, QNB Group analysis
indicated further slowing in its economic growth. These China’s rate of GDP growth has been on the
negative signals are partly offset by an improvement in decline since a recent year-on-year peak of 12.1% in the
inflation and exports, according to QNB Group. first quarter of 2010. That was a result of government
China’s economic trajectory should become clearer in stimulus and monetary easing which enabled a sharp
the next few months and could have a significant rebound from fall in exports due to the global crisis. By
impact on the global economy and the GCC. the first quarter of 2012, growth had fallen to 8.1%, the
In just a decade, China’s economy has lowest rate in a decade, barring the first half of 2009.
quadrupled in size, to become the world’s second Of particular concern was the services sector, which
largest, with GDP of nearly US$6trn. The real growth grew at the slowest rate in over two decades.
rate during this period has exceeded 10%. There have been further signs of weakness
Many factors have contributed to China’s from other indicators such as the official Purchasing
remarkable rise. A series of economic reforms, starting Managers Index (PMI) which recorded 50.4 in May.
in 1978, legalised private enterprise and attracted This was only narrowly above the 50 point mark which
foreign investment into export industries. This provided divides expansion from contraction. An alternative PMI
a spark to growth, from a low base, that was then fed by survey, produced by HSBC, has been consistently
domestic investment in infrastructure and real estate. indicating contraction since last October.
This dynamic was supported by a demographic Another key indicator, the Business Climate
dividend, owing to a boom in the working age Index, has also been weak and recorded 115.6 in the
population and migration from rural to urban areas, first quarter, its lowest level since the first half of 2009.
supplying industries with cheap and plentiful labour. Other indicators such as electricity consumption and
However, such high growth rates cannot retail sales have also been weak recently.
continue indefinitely. The key question is whether
China will gradually ease to a more sustainable growth Inflation & PMI (2009-May 2012)
rate, driven more by consumption than investment, or 8% 60
face a sharper and disruptive deceleration. The later
“hard landing” scenario, often described as a prolonged
period of growth below 7%, is widely seen as one of the
most serious risks facing a fragile global economy. 4%
GDP and Business Climate (2007-Q112)
16% 160
0% 50
Real GDP growth (%)
Jul 09
Jul 10
Jul 11
Apr 09
Apr 10
Apr 11
Apr 12
Oct 09
Oct 10
Oct 11
Jan 09
Jan 10
Jan 11
Jan 12
Business Climate Index
14% 140
-4% Inflation (%)
Purchasing Managers Index
12% 120
-8% 40
10% 100
Source: National Bureau of Statistics, QNB Group analysis
8% 80
On the positive side, exports have been holding
up better than had been expected, recording a 15.3%
annual growth rate in May, more than double the
6% 60 median market forecast.
Q107 Q108 Q109 Q110 Q111 Q112

2. QNB Economics
economics@qnb.com.qa
17 June 2012
Furthermore, inflation fell to 3% in May, the third largest purchaser of GCC exports, consuming
thanks in part to falling oil prices. This is its lowest 9.9%. Its importance for Qatar is not as high, as it
level in nearly two years, and comfortably below the supplies just 5.8% of imports and purchases 4.1% of
official target of 4%. Lower inflation potentially gives exports.
the government more room to deploy fiscal and Nonetheless, QNB Group does not expect that a
monetary stimulus without causing an upwards spiral in hard landing in China would lead to a substantial fall in
prices. its demand for GCC oil, just a declaration in the rate of
Indeed, the central bank has already made its demand growth. This is because the powerful trend
first move, reducing interest rates by 0.25% on June towards increased Chinese car ownership is expected to
7th, the first cut since 2008. It might look to make continue. The ratio of cars to population in China is
further cuts and to reduce bank reserve requirements, only about 7%, less than half the global average.
both measures aimed at boosting bank lending for A sharp correction in the construction sector
investment and consumption, and hence supporting could, however, dent other global commodity prices,
growth. such as metals. This would harm metal exports from the
However, according to QNB Group, there are GCC, but could also benefit many of the major
concerns that there may already have been infrastructure and real estate construction projects
overinvestment in some sectors, particularly in real underway in the region, by reducing their costs.
estate, with a potential bubble in some parts of the Despite its problems, China still remains one of
country. Moreover, some companies and local the brightest spots in a gloomy global economy. By
government bodies may have taken on too much debt to comparison, two other emerging giants, Brazil and
fuel the investment boom. India, have produced disappointing data in recent
Other government intervention includes months. India’s real GDP growth in the first quarter of
subsidies on household appliances to encourage 2012 was just 5.3%, and Brazil’s was only 0.8%, as
domestic consumption. It should become clearer during drought devastated its agricultural production. If China
the summer whether or not the monetary and fiscal were to follow in their footsteps, then the period ahead
policy measures are able to check the declining growth for the global economy could be even more challenging
rate. than currently expected.
China is a significant trade partner for the
GCC. In 2011 it was the largest supplier to the region,
providing 13.2% of imports, and also rose to become