China’s economy is now slowing significantly. The AMP’s Dr Shane Oliver says it has slowed significantly on the back of slowing exports and a domestic property slump. The share market is off 70%.
Growth is likely to slow to 8% in 2009, but a hard landing (say 5% growth) is unlikely.
The Chinese economy is slowing
The evidence is now overwhelming that China’s economy has slowed significantly:
• Growth in real GDP has slowed from a peak of 12.6% over the year to the June quarter last year, to 9% over the year to the September quarter this year, its slowest pace in over five years;
• Industrial production has slowed from annual growth of around 18% a year ago to 11.4% last month;
• Auto sales fell 2.8% for the year to September, the first fall since early 2005;
• China’s average house prices have fallen about 4% from their peak in January and home sales are down 42% from a year ago;
• Money supply and loan growth are running well below year ago levels; and there are
• Numerous anecdotes of business failures amongst east coast exporters (for example, half of China’s toy exporters closed in the first seven months of this year);
The slowdown is primarily being driven by three factors:
• A slowdown in export volumes in response to the US and European slumps;
• A property slump which resulted from policy measures designed to slow the economy and property development that were put in place since 2004; and
• Production restrictions in the Beijing area associated with the Olympics and Paralympics have exaggerated the recent weakness in production.
Leading indicators suggest a further deceleration ahead –
The OECD’s leading indicator for China suggests a slowdown in growth to around 8%.
This is likely to be led by a further slump in export growth to around 10% from 21% currently on the back of the global slump and a sharp rise in the trade weighted value of the Renminbi in recent months.
The impact of the property downturn will also feed through to business investment (where property construction accounts for about 25% of fixed asset investment) and consumer confidence.
But why not a hard landing?
While China is slowing significantly it’s unlikely to have a hard landing, which given China’s potential growth rate of around 8 to10% and need to find jobs for roughly 10 million rural workers each year would mean growth of around 5%.
• The Chinese banking system looks solid compared to that in the developed world. Loan to valuation ratios have been falling, there are limited linkages to global banks, there is no dependence on foreign capital, there is no confidence crisis and credit availability has only been an issue to the extent that the Government has restricted it.
• The Chinese corporate sector is in good shape. Leverage has been falling and the level of retained earnings is high as is the return on equity. The equity market only accounts for 15% of corporate financing.
• Consumer spending is likely to remain robust. Despite the 70% slump in the Chinese share market and falling house prices, consumer spending has actually accelerated recently. See the next chart.
Chinese consumers have very high saving rates, are not very geared and only 5% of Chinese households have a significant share exposure.
On top of this the authorities have been trying to boost consumer spending via a range of policies including social security reforms, labour reforms and assistance for rural workers; these policies seem to be working.
Monetary conditions are now being eased aggressively with two interest rate cuts in less than two months.
This has been made possible by a sharp fall in inflation.
In fact, after years of plus 20% pa investment growth it’s likely that the slump in demand for China’s exports will see deflation become more of an issue as excess capacity starts to build up.
With China’s key lending rate at 6.93% there is plenty of scope for further easing and this is likely to occur soon.
• Fiscal easing is now on the agenda with the Government looking set to increase spending on infrastructure related to agriculture, energy, transport and urban development.
Increased social spending and increased subsidies for farmers are also likely.
There is a lot of room for fiscal stimulus in China as the budget surplus is running around 2% of GDP.
• Policies are also set to be introduced to specifically boost the property sector including increased public housing construction, reduced transaction taxes and support for home purchases.
Some cities are already moving to stimulate their local property markets.
• Finally, further increases in export tax rebates for exports such as textiles are also likely.
The Chinese Government has switched focus from worrying about inflation to trying to stabilise and maintain fast growth. While China’s economy has slowed and is likely to slow further a hard landing is unlikely.
Furthermore, it should be noted that the current slowdown in China should be seen as cyclical.
Structural forces driving growth remain very strong.
These include strong productivity growth, huge competitive advantages, rapid urbanisation, surging consumer
