ECONOMIC OUTLOOK

By Anthony

While economic data released by the Chinese government ranged from being promising to being mixed in September, October's numbers were much weaker, indicating almost no evidence that the overall economic picture is picking up any steam from the month before. Particular data of note was October's industrial production which grew at 6.1 percent, a figure the same of the month prior but below the expected rate of growth. Retail sales were also down from the month prior from 10.7 percent in September to 10 percent in October. Furthermore fixed asset investment, typically used as a proxy for measuring construction and infrastructure spending, was surprisingly less weak than expected since it dropped from 8.3 percent in September to 8.2 percent in October, but was still a disappointing figure.

In spite of the mostly negative picture that the data suggests, there are still a few positive signs to hold on to if you are looking for a silver lining. While the overall trend appears to be negative for October, there was still growth in a few sectors including output of electricity, steel, glass, and cement. In spite of mostly negative data, it may be pointing towards stabilization from September to October despite a number of negative figures. Regardless, there are a number of economists that worry that these figures are overblown and do not shed great light on the overall macroeconomic picture.

Continued Worries of Slowdown

One such economist is Capital Economics' China watcher Julian Evans-Pritchard who was particularly worried about the continuation of China's slowdown in light of the steadiness and stabilization that has been seen over the past few months, suggesting that consumption habits and the retail sector have slowed down considerably enough to regard the trend as being problematic. He also notes that majority of growth the Chinese economy has enjoyed over the past few months has largely been due to a pickup in private investment, mostly in form of mergers and acquisitions. According to Scotiabank, GDP figures are projected to decrease year-on-year basis by 2018. This demonstrates that even though the economy has, so far, avoided a hard landing, the slowdown will continue unless a myriad of economic figures increase or at the very least do not decrease, but remain the same.

As for interest rates, Economists at Goldman Sachs do not foresee any monetary policy changes significantly or incrementally over the upcoming months as another sign of market stabilization in spite of other weaker economic figures. While officials are still concentrating on using an increased surge in credit to continue to drive growth, central banks have promised to maintain a "prudent" monetary policy. This is in part to prevent what they refer to as any "asset bubbles" like what some critics have pointed to as a housing bubble or an overall credit bubble driven by decades of bond-market driven GDP growth. It should then be noted that the slowdown in property market is a counterintuitive positive sign despite the fact that it also points to a slowdown in economic momentum in the coming months.

Another factor that should be taken into consideration is the fact that, according to Fortune Magazine, construction and government spending has significantly helped the weakening economy in order to reach 6.5 to 7 percent growth targets. Speculation is building as to whether a reduction in these sectors can be boosted by consumption and innovation (the famous economic rebalancing often talked about) in a country whose GDP per capita (essentially the amount of money each person makes in a year) is only around $6500 US dollars. In other words, Chinese people may not simply have enough purchasing power to prop up the economy. Also, households tend to save about 30 percent of annual income, a staggering figure compared to the United States where households save only 5 to 6 percent of annualized income.

Is There A Light at the End of the Tunnel?

Nonetheless, the Chinese economy will continue the long and arduous process of transitioning. This is in part why the property market is cooling down, why investment growth is abating and a lift in financing and loan is being given by central and provincial banks. Fixed asset private investment in urban areas was stronger than expected for the month of October which is a promising sign but also the aforementioned slump in retail sales is a step in the wrong direction. In spite of this, another promising indicator of growth is a drop in the price of petrol from $1.28 a liter to $1.24 a liter which could help contribute to the wallets of all Chinese households. Petrol, according to economists, is the single largest expense item for most Chinese households. Forecasters suggest this drop in the price of petrol and the upcoming Christmas spending season will help contribute to retail sales and the larger economic shift that we have been witnesses to over the past couple of years.

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