As China Curbs Borrowing, Growth Shows Signs of Faltering

An economic slowdown in the country — coupled with the knock-on effects of widening trade disputes and slowing growth in Europe — may augur poorly for the global economy
A factory in Hangzhou, China



SHANGHAI — China’s government has been trying to break the country’s addiction to ever-rising debt, but its effort to crack down on easy money is starting to hit growth in the world’s second-biggest economy. Beijing has been concerned in recent years about the increased reliance on credit to keep the economy expanding briskly, worrying that it could lead to a financial crisis, or to a long period of stagnation like the one in Japan after the real estate market burst in the early 1990s. But curbing debt may have significant consequences in China and elsewhere. Countries around the world are much more closely tied to China than ever before, not just because of its role as the world’s biggest manufacturer by far, but also, increasingly, as a consumer. An economic slowdown in China — coupled with the knock-on effects of widening trade disputes and slowing growth in Europe — may augur poorly for a global economy that even recently seemed in rude health. Domestically, China’s credit crackdown has affected smaller businesses hardest. Though the country often appears to be dominated by its vast conglomerates and hulking state-owned enterprises, its economy is, in reality, somewhat more reliant on small businesses than its Western counterparts. And the way Beijing has gone about curbing lending in recent months is unintentionally hitting the most entrepreneurial segments of the economy, the governor of China’s central bank acknowledged in a speech on Thursday in Shanghai. Over all, there is growing evidence that a credit crunch is taking a toll on the Chinese economy. The National Bureau of Statistics released data in Beijing on Thursday showing that investment, retail sales and industrial production all slowed in May. The slowdowns in investment and retail sales were particularly sharp and unexpected. With that backdrop of eroding economic growth, the People’s Bank of China, the country’s central bank, conspicuously did not match on Thursday the Federal Reserve’s increase to interest rates on Wednesday. It had at least partially matched previous Federal Reserve interest rate rises since the autumn. With the Chinese economy showing signs of slowing and the authorities making it harder to borrow, small businesses are particularly vulnerable. They represent about three-fifths of economic output in China, compared with around half in Germany, Japan and the United States, according to Yi Gang, the governor of the People’s Bank of China. Now many of those small businesses are struggling for loans because of a wide-ranging government crackdown. Moody’s and Standard & Poor’s both downgraded China’s sovereign debt credit rating last year because of concerns about the country’s debt overhang. Even before deciding on Thursday morning not to match the Fed’s rate increase, though, the Chinese government had already made a pair of moves that appear to have been elaborately crafted to channel more money to smaller, more entrepreneurial businesses.