As the latter half of 2013 draws ever closer, economic commentators are still waiting for the much anticipated recovery in China to get underway. Whilst the broader global picture is seemingly improving, sentiment here remains tentative. Increasingly the predominant view amongst analysts, investors and media correspondents seems to be that the Chinese economy will remain on fairly shaky ground for the rest of the year. Further to that, the very real underlying risks which are lingering over policymakers’ heads are showing no signs of subsiding.

 

 

Reporting on the current state of China’s economy and the impact of slowing growth on consumer demand, the China Daily USA published an article in May which has raised some eyebrows amongst analysts. Traditionally, so the theory goes, when a nation’s economic circumstances are bleak, demand for certain cosmetic products amongst middle class women provides a stark and intriguing indication of the broader situation.

 

According to the report by Shi Jing, “When the economy declines, some people will start to buy more lipsticks, makeup and other cosmetics items to make themselves feel good. It is a phenomenon known as the ‘lipstick effect’. According to the market research firm Euromonitor International, the entire retail value of the beauty and personal care sector in China grew from CNY 184.1 billion (USD 30 billion) in 2011 to CNY 202.1 billion in 2012”.
 

If this notion is anything to go by, China’s cosmetics sector could be in for a good few months unless the macroeconomic outlook improves significantly. China’s Purchasing Managers Index, which hit a low of 49.2 in August last year, and other data sources are showing clear signs of a shaky economy. 

 

 

In a recent interview with Xinhua, economic researcher for the Agricultural Bank of China Fan Junlin claimed that "Weak external demand remains the biggest factor dragging down China's economic growth”. It is clearly the case that demand for Chinese exports is continuing to affect the overall economic growth outlook for 2013.

 

Going into June, analysts are still very much divided on whether external demand will pick up again later in the year. Whilst the US economy is seemingly gathering momentum, with a wave of encouraging figures being released in recent months, the situation in Europe remains fragile as France’s Finance Ministry announced in May that the economically important Eurozone nation has slipped back into recession. Even elsewhere in Asia, the warning signs of a recessionary economic environment are becoming ever more apparent. In May, Thailand announced that its GDP had contracted by 2.2% in the first quarter of the year.

 

For China, it seems increasingly likely that manufacturing will continue to slow down over the course of the year as a result of weak external demand. According to HSBC economist Hongbin Qu, "the slower growth of manufacturing activities in April confirmed a fragile growth recovery of the Chinese economy as external demand deteriorated”. He added that “the looming deflationary pressures also suggest softer overall demand conditions. All of this is likely to weigh on the labour market, which is likely to invite more policy responses in the coming months”.

In addition, the banking giant’s PMI dropped to 50.4 in April following March’s reading of 51.6. The figures for May are expected to remain disappointing, as it seems that only an increase in domestic investment and a significant surge in domestic demand can prevent a broad manufacturing slowdown in the second half of 2013.

 

 

The Chinese central and regional governments’ response to the threat of a speculative real estate bubble continues to dominate headlines in economic news reports worldwide. Despite the recent moves by authorities in several parts of China, including most notably Beijing and Hong Kong, the broad indications are that the country’s red hot real estate sector is continuing to flourish and attract speculative capital.

 

According to the National Bureau of Statistics, figures for April showed that prices for residential real estate increased in 68 out of 70 major Chinese cities. As the country’s biggest and fastest growing financial and commercial hub, Shanghai is increasingly becoming the central focus of nervous commentators. A report by CNN reporter Charles Riley explains that as a result of growing fears, “Authorities in Shanghai have told banks to stop issuing loans to individuals attempting the purchase of a third home, whilst Beijing announced that single residents will now be allowed to purchase only one home. Both cities said that they would strictly enforce a 20% capital gains tax on income earned from property sales”.

 

Moreover, Zhiwei Zhang, an economist at Nomura, pointed out that "This [data] suggests that polices aimed at cooling the property market have not yet tightened sufficiently". Furthermore, "We believe that this will add further pressure on the government to tighten monetary policy in the months ahead”. What happens next in China’s property sector is anyone’s guess at this point in time.

 

 

With the factors of a potentially overheating property sector and ongoing risks of high inflation on the one hand, and pressures on economic growth- coming from a weakening export driven demand on the other, Chinese policymakers and central bankers are currently in a very difficult position in terms of deciding whether or not to take action to stimulate the economy.

 

In its first quarterly report for 2013, the Chinese central bank stated that "we must stay committed to improving the quality of our economic growth, continue to implement prudent monetary policy, and make policies more pre-emptive, targeted and flexible… the foundation for stable economic growth is not solid yet and the intrinsic driver for growth has yet to be strengthened”. Many market analysts had hoped for a clearer indication that something would be done to improve the prospects of economic recovery. 

 

For the time being, it seems that anyone hoping for significant monetary measures to boost the economy will probably have to settle for strategic rhetoric. Given the risks associated with interventional policies, most analysts agree that despite the slowing GDP figures, Chinese authorities should avoid injecting too much extra capital and liquidity into the economy. Xu Hongcai, a senior economist at the China Centre for International Exchange, has argued that China “cannot rely too much on the central bank to support the economy”. He suggested that the more likely scenario is a slight increase in infrastructural investment and measures to improve domestic consumption. 

 

Although the macroeconomic data may be worrying, a ‘hands off’ approach would probably be the best strategy for the central bank- especially given that monetary easing could lead to more inflation and a much unwanted increase in speculative real estate investment.

 

By Tracy Hall