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July 12, 2012 3:48 pm
Global financial markets are braced for more evidence of the slowdown in China’s economy on Friday as it reports second-quarter economic data, with growth expected to be at its lowest in three years.
However, away from the glare of the headline numbers, several lesser-noticed leading indicators suggest that the world’s second-biggest economy – and the best hope for staving off a global recession as Europe and the US struggle – is weakening but far from collapsing.
Moreover, analysts say that a shift to much more stimulative policy during the past month is priming the pump for a Chinese recovery later this year from what is widely expected to have been about 7.5 per cent growth in the second quarter.
“A lot of things are pointing in the same direction. There have been aggressive interest rate cuts, liquidity injections, an increase in lending and more approvals of infrastructure projects,” said Shen Jianguang, an economist with Mizuho Securities. “We might see a pretty powerful recovery in the fourth quarter to make the full-year GDP [gross domestic product] reach 8 per cent.”
Crafting a reliable leading indicator is a tricky business in the world’s most mature economies, with analysts using a cocktail of different data points to try to get ahead of the curve in forecasting growth. In a developing nation, especially one that is growing and changing as quickly as China, the task is much harder because there are few consistent reference points to compare.
Yet in recent years, several leading indicators for China have garnered attention after doing a good job of predicting the economy’s slowdown at the end of 2008 and its subsequent recovery.
Three of the most respected leading indicators – one published by the Organisation for Economic Co-operation and Development, a second by China’s national statistics bureau and a third being the official purchasing managers’ index – have all showed a downward trend since early 2010, just like the economy itself.
But the declines have been much more gradual than their steep falls in 2008 and their rate of deceleration has slowed in recent months, hinting at a stabilisation in the Chinese economy.
In China, where many investors doubt the reliability of official growth data, the leading indicators also serve as a useful way of double checking the government’s numbers. The OECD leading indicator, for example, includes the production of chemical fertiliser, motor vehicles and buildings.
While forecasting Chinese growth is tough, analysts say that interpreting the direction of policy is much simpler. One single data point – new bank lending – captures in a nutshell what officials are trying to achieve, because the country’s banks are controlled by the government and also serve as its main conduit for stimulating or cooling the economy.
The latest bank figures, published on Thursday, confirmed that the government is clearly trying to support growth. New loans reached Rmb920bn in June, up from Rmb793bn in May and more than expected.
Zhang Zhiwei, an economist with Nomura, wrote in a note: “These data send another positive signal that policy easing is indeed working through the system, reinforcing our view that GDP growth bottomed in the second quarter and will rebound in the second half.”
The jump in bank lending followed two interest rate cuts in the past month, plus repeated pledges by Wen Jiabao, premier, to increase government spending.
If second-quarter growth comes in at 7.5 per cent and does indeed prove to be the trough of the current economic cycle for China, commentators who have described the country’s current downturn as a soft landing would have some vindication.
The peak-to-trough drop in growth would be roughly 4.5 percentage points from 2010 to now. That contrasts with a plunge of 8 percentage points in the previous downturn, from 2007 to the start of 2009.
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