Weakness in the West is exposing China's failure to make consumers a bigger part of the economy, pushing its leaders to promise a more balanced response to tough times than they managed during the previous barrage of stimulus. For China's stability, and world growth, they need to get it right.
After two years of cooling the economy following the splurge in spending in 2009, China has pledged a more "pro-active" economic agenda for 2012. The aim: to keep growth steady while preventing a potentially destabilizing rebound in inflation through what Beijing calls a "prudent" monetary policy.
But the long-promised shift to growth that is less reliant on supercharged and often wasteful levels of investment could be even harder to swallow this time around: China cannot count on support from recoveries in the U.S. and Europe to buoy exports, and another investment binge would lead to even greater imbalances.
Foreign investment in China fell nearly 10 percent in November in the latest evidence of the rising toll that weakness in the West is taking on the world's No. 2 economy.
With the European Union _ China's largest export market _ in the doldrums, Commerce Ministry spokesman Shen Danyang described trade prospects Thursday as "grim."
An economic planning meeting this week ended with pledges of greater flexibility in moving to fend off the chill from the European debt crisis.
After 30 years of rapid growth, the economy is bound to slow, Yu Bin, head of macroeconomic research at the Development Research Center of the State Council, or Cabinet, said Thursday.
"We believe China is now coming to the end of this period of high economic growth," he told reporters in Beijing.
The question is by how much.
China's economy grew 9.1 percent in July-September, after expanding 9.5 percent in the first half of the year. Yu said the government's forecast for growth in the coming year was "lower than 9 percent."
Three years ago, with exports plunging, a 4 trillion yuan ($586 billion) stimulus package backed by lavish bank lending helped China's manufacturing sector bounce back quickly from the ripple effects of the global crisis. Investment in construction projects and real estate went into overdrive.
That helped shift the economy toward a greater reliance on domestic demand instead of exports _ a needed rebalancing sought both by Beijing and by its trading partners. But the lending spree was so heavily weighted toward investment that it failed to raise consumer spending as a share of the economy, economists say.
Investment rose from 43 percent of economic activity in 2008 to over 50 percent in 2010. Consumer spending, the lion's share of activity in most modern industrial economies, fell.
"The failure to make significant progress in reorienting the economy toward household spending is now being exposed as foreign demand is again slowing," economist Mark Williams of Capital Economics said in a research note Thursday.
Despite the double-digit growth in retail sales, partly because it is coming from a low base, spending remains too low to make up for the demand lost from the no longer free-spending American baby boomers.
China's leaders have acknowledged the country's need to expand social services, slash household tax burdens and put more money in consumer pockets.
"It is unsustainable to have China's long term economic growth be overly reliant on investment," said Yu, of the Development Research Council. "The government has recognized that, which is why it has emphasized the importance of boosting domestic demand, especially consumer demand, to shift away from a model excessively reliant on investment."
Still, as China's leaders prepare for a succession to a new generation of communist leaders, the likelihood of major reforms appears slight. With labor unrest flaring and financial conditions deteriorating across many sectors, from small companies to government-backed building projects, Beijing is obsessed with stability.
Though most recognize the urgency for a more balanced, consumer-led economy, "Officials are most likely to err on the side of maintaining growth," Williams said. "In practice, the imbalance is likely to grow."
For now, China's leaders are committing to "fine-tuning" policies, such as easing credit by further loosening bank reserve requirements to put more cash back into the economy.
Reports say the government will support exports by setting up special trade "bases" and aiding exporters in inland areas, which have lagged behind the richer coastal regions.
Controls on the property sector will remain as authorities work to deflate a bubble brought on by the lending spree unleashed in 2009.
Stringent curbs on bank lending helped bring inflation down from a 6.5 percent peak in July to 4.2 percent in November. Property prices also have begun coming down, but they remain a priority for leaders anxious to prevent unrest linked to a weakening of the gains in quality-of-life that buttress the Communist Party's claim to power.
Other likely strategies include tax cuts and increased government spending in areas such as high-tech and renewable energy that Beijing hopes will help drive growth while keeping inflation in check.
Beijing has little choice, given the massive debt loads for banks and local governments left over from the 2009 lending bonanza, says Ren Xianfang of IHS GlobalInsight.
Though the investment boom worked wonders then, it carried risks of its own.
"The bottom line is: the policy tools available to China this time around will be much more limited compared with three years ago _ leaving the country's economy much more vulnerable to severe shocks," she said.
Alexa Olesen in Beijing contributed to this story.
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