up 12.8 percent over a year ago—both guresrepresent a slowdown in growth.• Te government reported that its purchasingmanager’s index (PMI) or services ell rom55.6 in March to 54.5 in April. Tis indicatescontinued moderate growth o services, but ata slower pace.• Te government reported that the PMI ormanuacturing dropped rom 50.9 in Marchto 50.6 in April—just barely above the criti-cal 50.0 level, below which output declines.In addition, an index o new orders in China’smanuacturing sector ell rom 52.3 in Marchto 51.7 in April. Tese reports mean that themanuacturing sector is barely growing.• Te government reports that, in April, con-sumer prices were up 2.4 percent over a yearago. Tis is well below the government’s targeto 3.5 percent ination. In addition, wholesaleprices ell 2.6 percent in April versus a yearago. Tis is likely due to declining commodity prices as well as excess capacity at actories.Te divergence o wholesale and retail priceswill boost the prot margins o retailers.Declining wholesale prices are likely to lead tolower consumer-price ination in the comingmonths. Lower ination will give the govern-ment leeway in deregulating the prices o resources and utilities. Such price controls leadto inecient use o resources, which in turnrestrain productivity growth and contributeto pollution.Te slowdown in economic activity, o course,is partly due to policies implemented by the new regime. Te efort to scale back borrowing by local governments is having a dampening impacton xed-asset investment—much o which isnanced by local governments. Te anti-cor-ruption campaign, including discouraging theentertaining o government ocials, appears to besuppressing retail sales.Te question now is what the government doesnext. Although ination is modest, the centralbank may not want to ease policy urther lest itencourage excessive borrowing or more property price increases. Tere is concern that, given theexcessive growth o credit and a property pricebubble, the government may not have the exibil-ity necessary to stimulate the economy.An easing o monetary policy and the openingo new sources o credit would only exacerbatethe credit market problems. More scal stimuluswould boost the parts o the economy that arealready growing rapidly, such as investment ininrastructure, but it would do little to assist theeconomy in shiing toward more sustainableorms o growth, such as consumer spending. Yetthe government may decide to engage in moreinvestment-driven stimulus. In other words,China appears constrained in its ability to under-take reorms that are necessary or long-termstructural adjustments and sustainability.
China is clearly becoming a more matureeconomy with growth that is more consistent withmiddle-income auence.
Aa Pacfc Economc Oook—Ma 2013