Business Growth in China Slows to near Standstill

07 September 2011

A Chinese services index showed that business growth slowed to a record low during August, providing further proof that the economy is cooling, since the government raised interest rates and limited property purchases. According to a statement from HSBC Holdings Plc and Markit Economic, one of the country's purchasing managers indices dropped from 53.5 in July to 50.6 in August, putting it close to the 50 cut-off marking expansion rather than contraction.


However the general feeling is that the tightening measures will not go on for much longer. With consumer spending still resilient the consensus the service sector is not likely to go into meltdown but will see more moderate growth.


At the moment the Chinese premier, Wen Jiabao, is more concerned about controlling inflation and cooling property prices. The recent turbulence on the financial markets and slowing in the expansion of other developed economies isn't likely to make him change his mind just yet. Especially with Chinese inflation running at the three year high of 6.5%.


China started imposing restrictive measures on home buying during the first quarter of 2010 in attempt to slow down prices. The controls have been expanded this year, with higher deposits and mortgage rates limiting the number of homes a family is able to buy.


The Chinese premier thinks the measures to control the property market are now at a critical stage, and is switching his focus on second and third tier cities.


In spite of concerns that the Chinese property market may be developing into a bubble, experts generally believe it is unlikely to collapse because of households low leveraging and the general feeling that credit tightening is reaching the end. In the long run these tightening measures are expected to be good for China's property market.

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