SLOWING ECONOMY LEAVES CHINESE LEADERS WITH TOUGH CHOICE / THE WALL STREET JOURNAL

Slowing Economy Leaves Chinese Leaders With Tough Choice


By Richard Silk And Esther Fung


BEIJING — China's manufacturing and property sectors slid further last month, leaving Chinese leaders with what economists said is a tough choice of accepting the economic slowdown under way or stimulating the economy at the risk of exacerbating longer-term problems.

More signs of the sharp slowdown under way came Tuesday with the release of more indicators. China's official manufacturing purchasing managers index, a measure of activity in the factory sector, staged a small rebound. The index edged up to 50.3, compared with February's 50.2, where any figure below 50 indicates contraction. On a seasonally adjusted basis, the figure should be close to 49.0, according to Louis Kuijs, an economist at RBS.

The HSBC PMI, a private-sector index, fell to 48.0 in March from 48.5 in February. Overall, manufacturing—which accounts for almost half of China's economy—looks sluggish, Mr. Kuijs and other economists said.

"Domestic economic activity slowed across the board in early 2014," said Mr. Kuijs. With excess capacity in some industries and future demand uncertain, many companies are reluctant to invest, he said.

Real estate, a vital component of China's long boom, also shows signs of strain. Average new-home prices were up 10% from a year earlier in March, data provider China Real Estate Index System said Monday. But the pace marked the third-straight month of deceleration, and prices fell year-over-year in 12 of the 100 cities covered by CREIS, up from 10 cities recorded in February.

The weakening economy adds to concerns from economists that China is in danger of missing the government-set economic growth target for the first time in 16 years.

The government announced the target of "about 7.5%" early last month. Only weeks later, as the gloomy statistics piled up, the State Council, the government's executive body, said it was prepared to tweak growth through limited measures—an easing of monetary policy, accelerated approval of infrastructure projects.

At a meeting with provincial leaders last week, Premier Li Keqiang said downward pressure on the economy shouldn't be ignored, according to state news agency Xinhua.

"My biggest concern is that we're moving toward fiscal or monetary stimulus, and I think that's the wrong policy," said Haibin Zhu, chief China economist at J.P. Morgan.

Last year, China eked out 7.7% growth, helped along by a midyear push from the government in the shape of looser monetary policy and faster approvals for infrastructure. In the slowing economy, some companies are struggling to repay debts. Last month a solar-panel manufacturer, a steelmaker and a small property developer—all industries afflicted by overcapacity—defaulted on bank loans and a bond payment, sparking fears of wider trouble in the financial system.

Fresh stimulus, however, potentially could worsen a buildup of debt and overcapacity, said Mr. Zhu and other economists. China's total debt rose to 213% of GDP last year, from 140% in 2007, according to Standard & Poor's, a rating agency.

Housing is a particular problem. Worried about falling prices, potential home buyers are staying on the sidelines as property developers introduce price cuts, sales agents said. Angry home buyers in cities like Changzhou and Hangzhou have recently trashed showrooms after developers introduced discounts of as much as 20% to stimulate sales of unsold units.

"Signs are mounting that the housing market in a number of cities is not just cooling but actually cracking," said Wei Yao, an economist at Société Générale.

The government could ease credit or reverse curbs it introduced on house purchases to cool the market when it was hot. But many of the smaller cities already show signs of being overbuilt. "China is producing more residential property than it really needs," said Mark Williams of Capital Economics, a research firm.

Many economists expect a cut in banks' reserve requirement ratio, which would free up more money for lending. The central bank can also ease financing conditions by keeping interbank rates low.