Thursday 22 October 2009

Stimulus-driven China growth risks slowdown

China’s stimulus-induced lending binge probably propelled growth in the third quarter to its fastest pace in a year. Now, policymakers have to figure out how to wean the economy off state support.

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Guanyu said...

Stimulus-driven China growth risks slowdown

Halt to spending by govt could unnerve investors; extending it for long is risky

22 October 2009

(BEIJING) China’s stimulus-induced lending binge probably propelled growth in the third quarter to its fastest pace in a year. Now, policymakers have to figure out how to wean the economy off state support.

The country’s rebound has been powered by four trillion yuan (S$816 billion) of spending on railways, roads, power plants and public housing. The programme ends next year, forcing Premier Wen Jiabao to find new ways to sustain the expansion with increased consumer spending and the financing of small businesses.

‘This has been growth on steroids,’ said Michael Pettis, a Peking University finance professor and former head of emerging markets at Bear Stearns Cos. ‘The question now is how to stop pumping so much money into the system without a sharp reduction in growth.’

State-directed support will make up more than four-fifths of growth this year, says the World Bank, spurring record iron ore production at Rio Tinto Group and car sales in China at Volkswagen AG.

An exit from the stimulus won’t be easy without unnerving investors: A plunge in July loan growth sent the Shanghai Composite Index down more than 20 per cent in August.

Extending the stimulus for too long risks the diversion of funds into stocks and real estate, an erosion of bank asset quality and inflationary pressures, the Asian Development Bank said in a report last month.

‘Such a scenario might trigger a round of severe monetary tightening in the medium term that would pull growth down again,’ the lender said.

The state-driven credit boom, which led to a record US$1.27 trillion in new loans in the first nine months, the stimulus plan and resulting growth in car and property sales will help the economy expand 11.2 per cent in the fourth quarter, according to Frankfurt- based Deutsche Bank AG.

That follows a 7.9 per cent expansion in the second quarter of this year, the first acceleration in growth since the last three months of 2006.

The benchmark Shanghai Composite Index of stocks reached a two-month high yesterday before today’s economic data releases, including gross domestic product (GDP). The gauge rose as high as 3,094.46 before trading at 3,079.22 at the 11.30am break in Shanghai.

Industrial output probably grew 13.2 per cent in September and investment in properties and factories surged 33.1 per cent in the first nine months, pushing GDP growth to 9 per cent in the third quarter.

It was the fastest pace since the third quarter of last year, according to the median estimate of 34 economists surveyed by Bloomberg News. They are due for release today.

Figures this week will probably show no signs of inflation, allowing the People’s Bank of China to keep in place what it calls its ‘moderately loose’ monetary policy. China will stick to that policy, guide reasonable loan growth to boost domestic demand and further cement the nation’s economic recovery, the central bank said on Sept 29.

Consumer prices dropped an estimated 0.8 per cent in September, according to the survey.

Retail sales rose 15.5 per cent last month, the fastest pace since January, according to the data survey. Car sales surged 84 per cent to more than one million units for the first time, putting China on course to overtake the United States this year as the biggest market for sales of new cars.

The stimulus, record lending, tax cuts and subsidies may help push China’s imports 30 per cent higher to US$313 billion this quarter, according to Zurich- based Credit Suisse Group AG. Iron ore imports jumped to a record 64.6 million tonnes last month while copper imports rose 23 per cent.

Guanyu said...

China’s demand for goods from overseas can play ‘a critical role in some locomotive way for the world’, Jim O’Neill, chief economist at Goldman Sachs Group Inc in London, said in a Sept 2 research note.

The lending boom, equivalent to about 50 per cent of China’s GDP in the first half, drove public and private investment in factories and properties 33 per cent higher in the first eight months, helping restore investor confidence in stocks and property after the start of the financial crisis.

The Shanghai index has soared 69 per cent this year as government-influenced spending helped growth rebound from 6.1 per cent in the first quarter, the slowest pace of expansion in almost a decade.

Wolfsburg, Germany- based Volkswagen, the biggest overseas carmaker in China, sold 150,000 cars last month, a monthly record, as sales for the first nine months surged 37 per cent. Car sales were buoyed after the government halved sales taxes and announced five billion yuan in subsidies to help rural residents to buy vehicles. Volkswagen is investing four billion euros (S$8.32 billion) to expand capacity in China through 2011.

‘China is the steam engine of the world economy,’ Volkswagen sales chief Detlef Wittig said in a Sept 25 interview in Frankfurt. ‘The lust for mobility there seems almost bottomless. We’re very well positioned there and will keep investing to secure our share of the market.’

Iron ore production at London-based Rio Tinto, the world’s third-largest mining company, rose 12 per cent in the third quarter to a record 47.5 million tonnes on demand from steel makers in China, the company said in an Oct 14 statement.

The effect of stimulus spending will taper off starting in mid-2010; the overall impact will be less than half what it was this year, said Wang Tao, a UBS AG economist in Beijing. -- Bloomberg