After experiencing such a rapid recovery, China’s economy has begun an adjustment.
By Huo Kan, Wang Jing, Yu Hai rong 07 September 2009
(Caijing Magazine) At an August 11 news conference in the Beijing, China’s National Bureau of Statistics (NBS) uncharacteristically announced several types of important data all at once. The room seemed agitated as spokesperson Li Xiaochao announced that industrial growth for the month of July was just 10.8 percent.
“How is it that the growth rate rose only 0.1 percent compared to June?” was the question in many minds.
The barely perceptible industrial growth rate increase became a major factor behind the adjustment in capital markets. The following day, Shanghai and Shenzhen stock markets took a nosedive, and both stock market indexes fell over 4 percent, with the Shanghai index falling harder, down 4.66 percent.
Fluctuations in the macroeconomic data of one month are not enough to confirm a trend; besides, July data generally tends to vary with seasonal changes. But after experiencing such a rapid recovery, China’s economy has begun an adjustment.
Investment slow down
The government-led increase in investment during the first half of 2009 is essentially responsible for China’s fast-paced recovery. In July, however, that generating force weakened as central government investment slowed.
Industrial production growth maintained its momentum but fell noticeably below expectations. Previously, economists interviewed by Caijing all agreed that July’s industrial growth rate would be around 11.5 percent.
In response, Goldman Sachs Gao Hua Securities Chinese macro economist, Qiao Hong said that, since 2003, growth rates in July have always been lower than in June. Therefore, “the relatively weak numbers for July do not necessarily indicate a new trend.”
Economist Wang Xiaoguang believes a 10 percent growth rate is a creditable step, considering that demand has yet to increase enough to support continued acceleration. Since exports, which contribute heavily to industrial growth, did not significantly improve in July, growth in industrial production relied mainly on investment, which was also slow.
The urban fixed asset investment growth rate in July also fell further than expected. Data show that urban fixed asset investment increased a total of 32.9 percent between January and July 2009, slightly below the 34 percent market forecast. Caijing calculated that fixed asset investment grew 29.9 percent in July, 5 percentage points less than in June. This is the first time since March that the monthly investment growth rate has fallen below 30 percent.
From January through July, 2009, central government investment projects totaled 837 billion yuan, 25.3 percent higher year-on-year, but 3.3 percentage points lower than the growth rate for the second half of 2008. In July, central government project investment only grew 14.6 percent, 15 percentage points lower than the growth rate in June.
Investment in local projects was relatively stable and grew 33.7 percent in the first half, just 0.4 percentage points lower than the growth rate for the previous six months.
Ha Jiming, chief economist of China International Capital Corp. (CICC), said that investment growth fell below expectations mainly due to the halt of central government investment in July. However, he said, “China’s central government has 207.5 billion yuan allocated for investment before the end of the year. Most medium-term capital construction projects are just now starting. Investment levels should remain high.”
According to the financial budget for 2009, the central government will spend a total of 487.5 billion yuan in new investments this year, of which 280 billion yuan has already been allocated. After 70 billion yuan in allocations from the central government around the end of April and the beginning of May, it wasn’t until July that the government spent 80 billion yuan more in the year’s fourth round of investments.
“The investment slowdown in July was seasonal,” Wang said, attributing the slowdown to project construction cycles and the extreme heat of July. He maintains that third quarter investment growth will not be so low. However, after experiencing two quarters of rapid increases in investment, Wang believes, the market may already have entered a plateau of “stable spending and steady growth.”
Policy Changes
With China’s overdependence on an investment-based recovery, a slower pace may not be a bad thing. Growth in GDP that is 90 percent based on government investment is unsustainable. With improving public confidence, minor adjustment in government policies is inevitable.
In fact, the decrease in the growth rates of investment and industrial production can be attributed somewhat to recent policy changes.
“Policies need to maintain a relaxed appearance, but at the same time be discreetly tightened,” Qiao Hong said. He includes the central bank’s open market operations and the “instruction window,” as well as stricter supervision from China’s Banking Regulatory Commission.
July changes in elements of cash flow and investment data are also intriguing. New projects totaled only 30,000, compared to an average of 40,000 per month during the first half. Additionally, planned investment for new projects totaled just 1.2 trillion yuan in July, 43 percent lower than June, significantly lower than average planned investment for new projects between March and June.
“Slower investment growth indicates a decrease in government financial support through reduced spending,” Zhu Baoliang, director of China’s State Information Center Economic Forecast Department, told Caijing.
Caijing’s guest economist Huang Yiping said, “the time to end economic stimulus policies has not yet arrived, but minor policy changes are necessary.”
The government’s strong mobilization of resources led to a quick economic rebound, and the large number of new projects prevent expansion policies from being quickly reversed. Once the global economy recovers, China’s economy will likely overheat quickly.
“Upper-level decision-makers are expected to tighten economic policies come mid October or in early December,” Qiao said. He expects that if third quarter GDP growth is not strong enough, especially if export growth is weak, then policy changes will be postponed to December when the Central Economic Work Conference is convened.
Next Step
By making moderate changes in investment patterns, the government will help prevent severe fluctuations in the future. But the current question remains, can the economy sustain its recovery?
Consumption in July was relatively stable. Retail sales rose 15.2 percent, 0.2 percentage points higher than the growth rate in June. But consumption will likely be unable to replace government spending as the primary force behind the recovery anytime soon.
CICC economist Shen Jianguang said that consumption maintained its current growth rate of around 15 percent mainly due to large amounts of government spending during the first half, and that “it is unlikely consumption will increase substantially in the future.”
July foreign trade numbers were comparatively better. Data announced by the General Administration of Customs show that in July, China’s foreign trade totaled US$200.21 billion, 19.4 percent below July 2008 and 9.6 percent higher than June 2009.
In July, foreign trade decreased year-on-year even though it increased compared to June. Major government institutions all agreed that this resulted in part from the inflated numbers of 2008. In July 2008, many factories fought for exports before shutting down for the Beijing Olympics. Exports rose rapidly, reaching a rate of 26.9 percent, 9.2 percentage points higher than in June 2008. Exports that month, totaling US$136.6 billion, also reached a record high.
According to the General Administration of Customs, since March, China’s foreign trade has rebounded for five straight months, and the trend for month-on-month growth is for the most part established.
Companies, however, are less optimistic. From the many export companies that Caijing contacted, the most positive response is “it has improved since earlier this year, but growth is still only 10-20 percent.” The more popular answer is “hopefully, things will look better later this year.”
Huang expected that export recovery will no longer seriously impact GDP, rather that “in the short term, even if exports do hit a new high, the hope that external demand will make up for slack domestic investment and consumption is implausible.” In the long run, considering that global spending trends are changing, China can no longer depend on exports to exert the same lift on the economy as from 2001 to 2008.
“The next step is not consumption, nor is it exports. It must be private investment,” said Zhu.
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Economic Recovery Adjustment
After experiencing such a rapid recovery, China’s economy has begun an adjustment.
By Huo Kan, Wang Jing, Yu Hai rong
07 September 2009
(Caijing Magazine) At an August 11 news conference in the Beijing, China’s National Bureau of Statistics (NBS) uncharacteristically announced several types of important data all at once. The room seemed agitated as spokesperson Li Xiaochao announced that industrial growth for the month of July was just 10.8 percent.
“How is it that the growth rate rose only 0.1 percent compared to June?” was the question in many minds.
The barely perceptible industrial growth rate increase became a major factor behind the adjustment in capital markets. The following day, Shanghai and Shenzhen stock markets took a nosedive, and both stock market indexes fell over 4 percent, with the Shanghai index falling harder, down 4.66 percent.
Fluctuations in the macroeconomic data of one month are not enough to confirm a trend; besides, July data generally tends to vary with seasonal changes. But after experiencing such a rapid recovery, China’s economy has begun an adjustment.
Investment slow down
The government-led increase in investment during the first half of 2009 is essentially responsible for China’s fast-paced recovery. In July, however, that generating force weakened as central government investment slowed.
Industrial production growth maintained its momentum but fell noticeably below expectations. Previously, economists interviewed by Caijing all agreed that July’s industrial growth rate would be around 11.5 percent.
In response, Goldman Sachs Gao Hua Securities Chinese macro economist, Qiao Hong said that, since 2003, growth rates in July have always been lower than in June. Therefore, “the relatively weak numbers for July do not necessarily indicate a new trend.”
Economist Wang Xiaoguang believes a 10 percent growth rate is a creditable step, considering that demand has yet to increase enough to support continued acceleration. Since exports, which contribute heavily to industrial growth, did not significantly improve in July, growth in industrial production relied mainly on investment, which was also slow.
The urban fixed asset investment growth rate in July also fell further than expected. Data show that urban fixed asset investment increased a total of 32.9 percent between January and July 2009, slightly below the 34 percent market forecast. Caijing calculated that fixed asset investment grew 29.9 percent in July, 5 percentage points less than in June. This is the first time since March that the monthly investment growth rate has fallen below 30 percent.
From January through July, 2009, central government investment projects totaled 837 billion yuan, 25.3 percent higher year-on-year, but 3.3 percentage points lower than the growth rate for the second half of 2008. In July, central government project investment only grew 14.6 percent, 15 percentage points lower than the growth rate in June.
Investment in local projects was relatively stable and grew 33.7 percent in the first half, just 0.4 percentage points lower than the growth rate for the previous six months.
Ha Jiming, chief economist of China International Capital Corp. (CICC), said that investment growth fell below expectations mainly due to the halt of central government investment in July. However, he said, “China’s central government has 207.5 billion yuan allocated for investment before the end of the year. Most medium-term capital construction projects are just now starting. Investment levels should remain high.”
According to the financial budget for 2009, the central government will spend a total of 487.5 billion yuan in new investments this year, of which 280 billion yuan has already been allocated. After 70 billion yuan in allocations from the central government around the end of April and the beginning of May, it wasn’t until July that the government spent 80 billion yuan more in the year’s fourth round of investments.
“The investment slowdown in July was seasonal,” Wang said, attributing the slowdown to project construction cycles and the extreme heat of July. He maintains that third quarter investment growth will not be so low. However, after experiencing two quarters of rapid increases in investment, Wang believes, the market may already have entered a plateau of “stable spending and steady growth.”
Policy Changes
With China’s overdependence on an investment-based recovery, a slower pace may not be a bad thing. Growth in GDP that is 90 percent based on government investment is unsustainable. With improving public confidence, minor adjustment in government policies is inevitable.
In fact, the decrease in the growth rates of investment and industrial production can be attributed somewhat to recent policy changes.
“Policies need to maintain a relaxed appearance, but at the same time be discreetly tightened,” Qiao Hong said. He includes the central bank’s open market operations and the “instruction window,” as well as stricter supervision from China’s Banking Regulatory Commission.
July changes in elements of cash flow and investment data are also intriguing. New projects totaled only 30,000, compared to an average of 40,000 per month during the first half. Additionally, planned investment for new projects totaled just 1.2 trillion yuan in July, 43 percent lower than June, significantly lower than average planned investment for new projects between March and June.
“Slower investment growth indicates a decrease in government financial support through reduced spending,” Zhu Baoliang, director of China’s State Information Center Economic Forecast Department, told Caijing.
Caijing’s guest economist Huang Yiping said, “the time to end economic stimulus policies has not yet arrived, but minor policy changes are necessary.”
The government’s strong mobilization of resources led to a quick economic rebound, and the large number of new projects prevent expansion policies from being quickly reversed. Once the global economy recovers, China’s economy will likely overheat quickly.
“Upper-level decision-makers are expected to tighten economic policies come mid October or in early December,” Qiao said. He expects that if third quarter GDP growth is not strong enough, especially if export growth is weak, then policy changes will be postponed to December when the Central Economic Work Conference is convened.
Next Step
By making moderate changes in investment patterns, the government will help prevent severe fluctuations in the future. But the current question remains, can the economy sustain its recovery?
Consumption in July was relatively stable. Retail sales rose 15.2 percent, 0.2 percentage points higher than the growth rate in June. But consumption will likely be unable to replace government spending as the primary force behind the recovery anytime soon.
CICC economist Shen Jianguang said that consumption maintained its current growth rate of around 15 percent mainly due to large amounts of government spending during the first half, and that “it is unlikely consumption will increase substantially in the future.”
July foreign trade numbers were comparatively better. Data announced by the General Administration of Customs show that in July, China’s foreign trade totaled US$200.21 billion, 19.4 percent below July 2008 and 9.6 percent higher than June 2009.
In July, foreign trade decreased year-on-year even though it increased compared to June. Major government institutions all agreed that this resulted in part from the inflated numbers of 2008. In July 2008, many factories fought for exports before shutting down for the Beijing Olympics. Exports rose rapidly, reaching a rate of 26.9 percent, 9.2 percentage points higher than in June 2008. Exports that month, totaling US$136.6 billion, also reached a record high.
According to the General Administration of Customs, since March, China’s foreign trade has rebounded for five straight months, and the trend for month-on-month growth is for the most part established.
Companies, however, are less optimistic. From the many export companies that Caijing contacted, the most positive response is “it has improved since earlier this year, but growth is still only 10-20 percent.” The more popular answer is “hopefully, things will look better later this year.”
Huang expected that export recovery will no longer seriously impact GDP, rather that “in the short term, even if exports do hit a new high, the hope that external demand will make up for slack domestic investment and consumption is implausible.” In the long run, considering that global spending trends are changing, China can no longer depend on exports to exert the same lift on the economy as from 2001 to 2008.
“The next step is not consumption, nor is it exports. It must be private investment,” said Zhu.
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