The Western World Slows Down - Can Beijing Maintain its Growth Engine?
China's growth is expected to be 8.8 percent in 2012, according to the latest Asia Economic Monitor, issued by the Asian Development Bank (ADB) on Tuesday 6 December.
The semi-annual report, which assesses the 10 ASEAN economies as well as those of China, the Republic of Korea, and Taiwan, comes at a time when the latest economic data for November showed a clear slowdown in Chinese exports and imports growth. More signs can be seen of weakening global demand and therefore a push in Beijing towards a more explicit pro-growth stance.
Among them, China’s growth for this year is still expected to remain the highest in the region, and at 8.8% would be 0.3 percentage points lower than the forecast from September.
China faces two external economic threats, the economic crisis in the United States and in Europe. In the event that both the euro zone and the U.S. economies contract sharply, the impact on emerging East Asia would be serious yet manageable, said the Asia Economic Monitor.
"The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia, so the region's policymakers must be prepared to act promptly, decisively and collectively to counter what could be an extended global economic slowdown," said Iwan J. Azis, head of ADB's Office of Regional Economic Integration, which produced the report.
Europe is the top export market for China accounting for 15% of total exports, representing almost 4% of GDP. As private sectors of the US and other Western countries continue to deleverage and deal with fiscal consolidation, China will face a tougher export environment.
In addition to falling trade figures, the euro zone will see a reduction of bank credit as banks are forced to improve capital adequacy ratios by June 2012. Furthermore, the cost of financing within the euro zone is becoming more expensive as the bond spreads increase and deposits flow out to safer locations.
Economic growth in East Asia will continue to moderate into 2012 as growing sovereign debt problems in Europe and an anemic U.S. economy raise the spectre of a deep global economic downturn, the ADB said. The latest economic data released in early December shows that the Chinese domestic economy is slowing down along with the rest of world. In response, Beijing has prompted easing of monetary policy.
China Slows Down – Both Exports and Imports fall
Chinese exports grew at 13.8% in November y-o-y down from 15.9% in October y-o-y. Imports grew at 22.1% in November y-o-y also down from 28.7% y-o-y in October. Surprisingly, November export growth figures have been far above market expectations (Bloomberg consensus 10.9% y-o-y), giving Beijing more breathing space for looser monetary policy for the next several months as the global economy will likely continue to deteriorate.
The fall of November trade data combined with weaker industrial production figures and easing inflationary pressure will encourage Beijing to provide more support for growth and employment.
Hours after the data’s release, the Communist Party's top leaders said in a statement that they would ensure stable and reasonably fast economic growth in 2012, fine-tuning policy in tandem with changes in the global economy, Reuters reported.
Slowdown in domestic economic growth has prompted a fall in import figures. This is in contrast with October in which the import figure jumped in anticipation of monetary loosening; Chinese manufacturers started restocking inventory. Main commodity items such as iron ore, petroleum, and copper all showed a drop in import figures.
China’s gross domestic product growth may fall to around 8.8% in the fourth quarter of this year and its imports may decrease further, Bank of Communications stated in its report.
The nation’s trade surplus in November narrowed to USD 14.52 billion compared to USD 17 billion in October. The fall in the trade surplus and import growth will reduce the external pressure for CNY appreciation. The Chinese currency has kept appreciating against USD throughout November. The Chinese Yuan will likely keep appreciating against USD throughout 2012 with short-term depreciation to reflect minor strengthening of US Dollar.
Inflation Drops Sharply: One Less Thing to Worry About, for now.
With Inflation currently showing signs of being under control and consistent tepid international demand, leaders in Beijing will most likely continue to tweak monetary policy to increase the money supply and support growth.
November inflation fell to 4.2% y-o-y down from 5.5% y-o-y in October according to the National Bureau of Statistics (NBS). This is the lowest CPI y-o-y rise since September 2010.
On breakdown of the CPI calculations, food prices, which account for nearly one-third of the basket of goods used to calculate CPI, moved down to 8.8% in November y-o-y from 11.9% y-o-y in October according to NBS data.
The huge fall in November CPI and PPI (2.7% in November down from 5% in October) has had a positive effect on market sentiments. As concerns over inflation take a back seat, the room for monetary loosening will increase.
Beijing Counters the Economic Slow Down - Monetary Environment Notably Eases
The central bank surprised the market on 30 November with an earlier-than-expected cut in banks' required reserves, the first such move in three years, signaling a policy shift, although in words, China has so far kept its official line of sticking with a "prudent" monetary policy, reported Reuters. "The government should accelerate loosening efforts and make stimulating economic growth a more prominent priority," HSBC economist Ma Xiaoping said. Many economists expect the reserve ratio cut on 30 November will be the first of a series of measures to loosen macroeconomic policy as inflation declines and growth slows. Ma said she expects that China will cut the reserve ratio again in January, and may also cut benchmark interest rates if growth slows dramatically.
Chinese financial institutions issued CNY 562.2 billion of credit in November, down from October’s CNY 586.8 billion but higher than economists' expectations of CNY 555 billion. Historically, credit growth falls towards the year-end but this increased lending level shows Beijing has mainly initiated easing of credit controls.
Lending in both October and November was higher than in the third quarter, which saw new CNY loans average around CNY 500 billion per month. UBS economist Wang Tao said she expects full-year bank lending to be around CNY 7.4 trillion, in line with a CNY 7 trillion to CNY 7.5 trillion unofficial target that analysts believe the central bank has set. For next year, new CNY loans will be around CNY 8 trillion, Wang added.
Gauging the Likelihood of a Hard Landing in 2012
Towards the second half of 2011, a substantial number of foreign investors have turned bearish on China’s economic prospects. They expect China to have a hard-landing in 2012 and predict that China’s growth could drop below 7% in the next several years. This will have a profound impact on sustainability of China’s economic model. Furthermore, a higher level of unemployment and business enterprise bankruptcy rates could pose serious social instability to the new Chinese leadership entering office in 2012.
In addition to reviewing conventional economic performance indicators such as trade data, inflation figures, and money supply, here are a few additional areas that Business Tianjin will monitor in order to detect China’s hard landing.
First is non-performing loans. Local governments have lent an enormous amount of capital to state owned enterprises to take on risky long-term projects and many of them have already turned sour and will inevitably leave large holes in local governments’ balance sheets.
Second is China’s real estate industry. China’s property market is closely tied to government policy. In the past several months, Beijing maintained its tight restriction on the property market. As a result, property prices have sharply declined. Because Chinese households have few areas of investment as the real interest rate remains negative, the fall of property prices will remove a significant portion of Chinese household’s overall wealth. This will make consumption driven structural adjustment in the economy much more difficult as private consumption will also be likely to fall.
Third is underground banking. Beijing’s 2008 stimulus package was distributed mainly among SOEs and allowed limited access to SMEs. SMEs turned to informal channels for credit, and had to borrow capital at high interest rates. A large number of SMEs used property as collateral for informal loans and the collapse of the property market could set off a vicious cycle of major market correction that we witnessed in the US after the sub-prime mortgage crisis.
Both bear and bull sides have a strong argument over a hard landing versus a soft landing in 2012. The bear side claims that the current drivers of growth (top down investment and export driven approach) are unsustainable and a correction is coming and some even say it’s already underway as the real estate downturn has been triggered and subsequent dominos falling will start a major slowdown in China.
The bull side claims Beijing has been able to successfully engineer a soft landing through curbing inflation and asset bubbles. The economic pressure on China is a reaction to the global economy slowing and not a true reflection of China’s actual economic position. The bull camp claims that as Beijing increases its monetary support for manufacturers, China will be able to offset weakening export demand from Europe.
In 2012, Business Tianjin will monitor the likelihood of China experiencing a hard landing. There are two major external factors such as the US and Europe sovereign debt crisis as well as a major domestic adjustment to bring China’s economy back to a sustainable track. The list of household items for Beijing to carry out in 2012 that Business Tianjin will review is as follows,
1. Liberalize capital accounts: interest rate and foreign exchange rate
2. Strengthen the labor pool: investment in human capital, development of inland areas, increase in the retirement age, and increases in wages
3. Develop a sustainable energy and food supply: investment in non-renewable energy and renewable energy and land reform to industrialize agriculture
4. Invest in soft systems such as intellectual property and environmental sustainability
Aging demographics and Chinese policy makers have not spent enough time and attention on this topic. The nation with the world’s biggest population is entering a period where fewer workers will have to support more retirees and children than ever before. Arthur Kroeber of Dragonomics mentioned that China’s “stock of credit” had risen from 120 percent in 2008 to 168 percent in 2011 and that this was problematic as GDP growth needs to get growth from capital, but available capital was being increasingly tied up. He said that although the fiscal incentives given by China to assist with the Chinese economy had helped, there had been no follow-through policies and that structural reform was needed to follow capital injections.
China's growth is expected to be 8.8 percent in 2012, according to the latest Asia Economic Monitor, issued by the Asian Development Bank (ADB) on Tuesday 6 December.
