China’s annual GDP growth falls to 6.8%. How much worse can it get?
22 January 2009
The beast which gives its name to the Chinese New Year that begins on January 26th is meant to symbolise prosperity through fortitude and hard work, offering hope that China will soon regain its economic vigour. But an ox is often a castrated bull – which may be an apt description of China’s economic pain. New figures show that China’s GDP growth fell to 6.8% in the year to the fourth quarter, down from 9% in the third quarter and half its 13% pace in 2007. Growth of 6.8% may still sound pretty robust, but it implies that growth was virtually zero on a seasonally adjusted basis in the fourth quarter.
Industrial production has slowed even more sharply, growing by only 5.7% in the 12 months to December, compared with an 18% pace in late 2007. Thousands of factories have closed and millions of migrant workers have already lost their jobs. But there could be worse to come. Chinese exports are likely to drop further in coming months as world demand shrinks. Qu Hongbin, an economist at HSBC, forecasts that exports in the first quarter could be 19% lower than a year ago. 2009 may well see the first full-year decline in exports in more than a quarter of a century.
Economists have become gloomier about China’s prospects, with many now predicting GDP growth of only 5-6% in 2009, the lowest for almost two decades. The most dismal view comes from Albert Edwards, at Société Générale, a French bank, who thinks China may be sliding into outright recession. He points to a fall in electricity output of 6% in the year to the fourth quarter, down from average annual growth of 15% over the previous five years.
In the past, the growth in GDP and electricity use have tended to move together (see chart). Mr. Edwards reckons that a decline in electricity output may mean that GDP is falling, no matter what the official figures say. Equally worrying is the OECD’s leading indicator of economic activity in China, which has plunged to its lowest level in its 26-year history, lower even than during the slump in 1989, the year of the Tiananmen Square protests and massacre.
This makes for a compelling story. But the relationship between GDP and electricity consumption has been distorted by the uneven nature of this slowdown. Energy-guzzling heavy industries, such as steel and cement, bore the brunt of China’s downturn late last year. So it is not surprising that electricity use slumped.
Moreover, too much weight may be given to the declining exports, because it is often wrongly assumed that the slump in China’s growth has been caused mainly by a collapse in its exports to America and other rich economies. Yet in 2008 the fall in net exports (exports minus imports) accounted for less than half of its slowdown. More important was a collapse in housing construction, caused by the government’s efforts to deflate a potential bubble. This, in turn, reduced the demand for materials such as steel. So by the fourth quarter there had been a huge build-up in stocks, exacerbating the fall in production: steel output was 12% lower than a year earlier.
GDP growth is likely to continue to fall during the first half of 2009, sounding alarm bells among those who repeat the official mantra that China needs to grow by at least 8% a year to avoid social unrest (even though that number has no sound economic basis). But there is good reason to hope that by midyear the economy will perk up as destocking comes to an end and the government’s fiscal stimulus kicks in.
China’s 4 trillion yuan ($585 billion) package of infrastructure spending, subsidies and tax cuts for businesses has been trashed by many commentators as another “Chinese fake”. Most of it is not new money, they claim, and the central government will finance less than one-third of the planned spending; most of the rest will have to come from banks, which in the current climate may be reluctant to lend.
It is true that some of the extra spending had already been announced, but what matters for economic growth is how much spending will actually increase this year. The answer is a lot. For example, JPMorgan forecasts that transport investment will expand by an impressive 70% in 2009. HSBC estimates a total spending boost of 6-7% of GDP over this year and next.
Since the November package, the government has introduced other measures to support the economy. On January 21st it announced extra spending of 850 billion yuan over three years to improve health care. From February rural residents will get a 13% rebate on purchases of goods such as refrigerators, TVs and washing machines. Consumer spending will be dented by job losses and smaller wage rises but has so far remained strong, with retail sales up by 18% in real terms in the year to December. Interest rates have also been cut five times since September and, much more important, controls on bank lending have been scrapped. To help the property sector, minimum down-payments have been reduced from 30-40% of a home’s value to 20%, the transaction tax has been waived for properties held for at least two years, and more public housing is to be built.
The all-too visible hoof
Chris Wood, at CLSA, a brokerage, says the effectiveness of the stimulus hinges on the extent to which China is now a capitalist economy. The more “capitalist” it is, the deeper the downturn now; the more it is still a command economy, the better the chance of recovery in 2009. State-controlled firms, which account for one-third of industrial output and almost half of all investment, have been “asked” not to cut jobs and capital spending. All the big banks are state-owned and their chairmen are appointed by the government. If they get a phone call telling them to lend more, they are likely to do so.
Banks already seem to be following Beijing’s orders: total lending surged by 19% in the year to December. China is one of the few large economies whose banking system has not been crippled by the global credit crunch. Andy Rothman, also at CLSA, argues that “in China, there is only a credit crunch when the political leadership wants one”. He believes the economy will revive by midyear and achieve GDP growth of close to 8% for 2009 as a whole.
The obvious concern is that although heavy-handed government meddling may be more effective than market-based tools to pull an economy out of a deep downturn, it comes at a cost. Public investment will inevitably include some wasteful spending, and politically directed lending could add to excess capacity in some sectors and create new bad loans for banks. This may hobble the bull in the future. But first it needs to regain its virility.
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China’s Flagging Economy - Strong as an Ox?
China’s annual GDP growth falls to 6.8%. How much worse can it get?
22 January 2009
The beast which gives its name to the Chinese New Year that begins on January 26th is meant to symbolise prosperity through fortitude and hard work, offering hope that China will soon regain its economic vigour. But an ox is often a castrated bull – which may be an apt description of China’s economic pain. New figures show that China’s GDP growth fell to 6.8% in the year to the fourth quarter, down from 9% in the third quarter and half its 13% pace in 2007. Growth of 6.8% may still sound pretty robust, but it implies that growth was virtually zero on a seasonally adjusted basis in the fourth quarter.
Industrial production has slowed even more sharply, growing by only 5.7% in the 12 months to December, compared with an 18% pace in late 2007. Thousands of factories have closed and millions of migrant workers have already lost their jobs. But there could be worse to come. Chinese exports are likely to drop further in coming months as world demand shrinks. Qu Hongbin, an economist at HSBC, forecasts that exports in the first quarter could be 19% lower than a year ago. 2009 may well see the first full-year decline in exports in more than a quarter of a century.
Economists have become gloomier about China’s prospects, with many now predicting GDP growth of only 5-6% in 2009, the lowest for almost two decades. The most dismal view comes from Albert Edwards, at Société Générale, a French bank, who thinks China may be sliding into outright recession. He points to a fall in electricity output of 6% in the year to the fourth quarter, down from average annual growth of 15% over the previous five years.
In the past, the growth in GDP and electricity use have tended to move together (see chart). Mr. Edwards reckons that a decline in electricity output may mean that GDP is falling, no matter what the official figures say. Equally worrying is the OECD’s leading indicator of economic activity in China, which has plunged to its lowest level in its 26-year history, lower even than during the slump in 1989, the year of the Tiananmen Square protests and massacre.
This makes for a compelling story. But the relationship between GDP and electricity consumption has been distorted by the uneven nature of this slowdown. Energy-guzzling heavy industries, such as steel and cement, bore the brunt of China’s downturn late last year. So it is not surprising that electricity use slumped.
Moreover, too much weight may be given to the declining exports, because it is often wrongly assumed that the slump in China’s growth has been caused mainly by a collapse in its exports to America and other rich economies. Yet in 2008 the fall in net exports (exports minus imports) accounted for less than half of its slowdown. More important was a collapse in housing construction, caused by the government’s efforts to deflate a potential bubble. This, in turn, reduced the demand for materials such as steel. So by the fourth quarter there had been a huge build-up in stocks, exacerbating the fall in production: steel output was 12% lower than a year earlier.
GDP growth is likely to continue to fall during the first half of 2009, sounding alarm bells among those who repeat the official mantra that China needs to grow by at least 8% a year to avoid social unrest (even though that number has no sound economic basis). But there is good reason to hope that by midyear the economy will perk up as destocking comes to an end and the government’s fiscal stimulus kicks in.
China’s 4 trillion yuan ($585 billion) package of infrastructure spending, subsidies and tax cuts for businesses has been trashed by many commentators as another “Chinese fake”. Most of it is not new money, they claim, and the central government will finance less than one-third of the planned spending; most of the rest will have to come from banks, which in the current climate may be reluctant to lend.
It is true that some of the extra spending had already been announced, but what matters for economic growth is how much spending will actually increase this year. The answer is a lot. For example, JPMorgan forecasts that transport investment will expand by an impressive 70% in 2009. HSBC estimates a total spending boost of 6-7% of GDP over this year and next.
Since the November package, the government has introduced other measures to support the economy. On January 21st it announced extra spending of 850 billion yuan over three years to improve health care. From February rural residents will get a 13% rebate on purchases of goods such as refrigerators, TVs and washing machines. Consumer spending will be dented by job losses and smaller wage rises but has so far remained strong, with retail sales up by 18% in real terms in the year to December. Interest rates have also been cut five times since September and, much more important, controls on bank lending have been scrapped. To help the property sector, minimum down-payments have been reduced from 30-40% of a home’s value to 20%, the transaction tax has been waived for properties held for at least two years, and more public housing is to be built.
The all-too visible hoof
Chris Wood, at CLSA, a brokerage, says the effectiveness of the stimulus hinges on the extent to which China is now a capitalist economy. The more “capitalist” it is, the deeper the downturn now; the more it is still a command economy, the better the chance of recovery in 2009. State-controlled firms, which account for one-third of industrial output and almost half of all investment, have been “asked” not to cut jobs and capital spending. All the big banks are state-owned and their chairmen are appointed by the government. If they get a phone call telling them to lend more, they are likely to do so.
Banks already seem to be following Beijing’s orders: total lending surged by 19% in the year to December. China is one of the few large economies whose banking system has not been crippled by the global credit crunch. Andy Rothman, also at CLSA, argues that “in China, there is only a credit crunch when the political leadership wants one”. He believes the economy will revive by midyear and achieve GDP growth of close to 8% for 2009 as a whole.
The obvious concern is that although heavy-handed government meddling may be more effective than market-based tools to pull an economy out of a deep downturn, it comes at a cost. Public investment will inevitably include some wasteful spending, and politically directed lending could add to excess capacity in some sectors and create new bad loans for banks. This may hobble the bull in the future. But first it needs to regain its virility.
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