Why China’s economy is slowing down

China has reduced the growth target for this year to 7.5%, after 9.2% in 2011 and 10.4% in 2010. Blame it on the debt crisis in the eurozone, but also for Chinese banks.

No more double digit growth. Beijing has limited its growth target to 7.5% this year. If this scenario is correct, China will record the worst performance in the past 23 years. Apparently, 7.5% growth, the number that Western countries could only dream, is not so bad. For comparison, France hopes a 0.5% growth this year. But be aware that in China, 6.5% growth is the equivalent of a recession in Western countries.

What causes the underperformance of the Chinese economy? First the negative development of international trade. Growth of the second world economy is gradually but continuously slowing for over a year, mainly because of difficulties of exporters facing the debt crisis in Europe – the first export market for China – and a hesitant recovery in the U.S.. China’s trade surplus was halved within three years. It went down from nearly $ 300 billion to $ 157 billion.

Then, after the United States and Europe, China faces the financial risk. On the interbank market of China, interest rates are close to 5% when they were just over 2% in 2006. Like the Western banks, Chinese banks are realizing they will struggle to recover their debts.

Chinese banks will have to clean up their accounts

And for good reason: the boom in credit observed from 2009 has been exceptional. The balance sheet of commercial banks increased sharply from 200% to 240% of GDP on orders from Beijing, which wanted at all costs to continue to show strong growth, the only guarantee of social peace.

This credit boom financed unproductive sectors, including real estate. The share of this sector increased in eight years from 8.2% to 13% of GDP with huge overcapacity. Last October, the housing set for sales were up 25% year on year, while homes sold actually showed a drop of 40%. Today, many developers find themselves strangled.

To work around the credit crunch, banks have also made particularly doubtful loans off balance sheet. “Assets can be conveyed to the capital projects does not necessarily have access to bank loans with a relatively limited information on the credit quality of the final borrower … strange resonance with the structured products of the 2008 crisis”, Note Philippe Ithurbide, Research Director of Strategy and Analysis at Amundi in a recent study. In short, Chinese banks will also have to clean up their accounts in 2012. It has become difficult in these circumstances to finance the economy … and maintain social peace.

China needs a very strong growth – at least 8% – so that its labor market absorb the millions of migrant workers in the country, says an expert. In 2009, the crisis had put 20 million of them in difficulties. The stimulus package of over 4000 billion yuan was then possible to avoid breakage. But today, time is tightening.