China's Short-Term Gain, Long-Term Pain - Wall Street Journal

By TOM ORLIK

The latest manufacturing data out of China suggest the country's real economy is getting weaker. The WSJ's Deborah Kan speaks to Heard on the Street Columnist Tom Orlik.

For China's slowing economy, making things better will only make things worse.

The first indicator on China's manufacturing sector in Mayâ€"a flash reading from the HSBC Purchasing Managers Indexâ€"was weak. A reading of 48.7, down from 49.3 in April, suggests the economic climate remains frosty. Expectations of low loans in May suggest April's weakness has persisted.

The good news is that the government has shown signs of shifting more decisively into stimulus mode. A speech by Premier Wen Jiabao over the weekend put supporting growth at the top of the government's to-do list.

There was more. On Thursday, a front-page article in the state-owned China Securities Journal proposed further cuts in the reserve requirement ratio, and lowering the interest rate banks receive on 1.8 trillion yuan ($283.89 billion) in idle reserve deposits. That would shift the incentive for banks further in favor of lending.

Some are betting on more extreme measures. In the interest-rate swap market, investors are pricing in a shift to rate cuts in the year ahead.

That should support growth in 2012. But conspicuous by its absence in the rush to stimulate is any role for higher consumption. The main exception has been an insignificant 30.3 billion yuan subsidy for households to buy energy-efficient electrical appliances.

All this is as China's economy tilts further off balance. The breakdown of contributions to China's growth in 2011, released this week, shows that the share of investment rose again, up to 49.2% from 48.1% in 2010. The share of household consumption, meanwhile, was unchanged at 34.9%. Another credit- and investment-heavy response to slowing growth will do nothing to turn that around.

Hu Jintao and Wen Jiabao should be able to hand off to the next generation of leaders with growth for the year on target. But they will leave the difficult work of rebalancing all to do.

Want Heard on the Street live?

Sign up for individual email alerts as soon as each column is published, or a daily newsletter with all of the day's Heards.

Write to Tom Orlik at Thomas.orlik@wsj.com