October 11, 2012 7:59 pm
When China reports its third quarter economic data next week, it is widely expected to mark its seventh consecutive quarterly slowdown in growth.
China is still doing remarkably well by global standards: the economy probably expanded about 7.0-7.5 per cent year-on-year in the third quarter. But relative to the country’s recent past, the grinding slowdown has been a significant change that many companies and investors are struggling to digest.
“If you compare it to China’s growth rate before 2008, you’ve come down by about a third,” says Huang Haizhou, chief strategist with China International Capital Corp.
The causes of the slowdown are clear enough. First, exports, once a leading engine of the Chinese locomotive, have become a drag instead. Net exports used to contribute about 2 or 3 percentage points to China’s growth rate. Now, with external demand so weak, sluggish exports will actually subtract about 1 percentage point.
Second, investment appears to have finally peaked at nearly 50 per cent of gross domestic product, a record high for a big economy in peacetime.
Although there is still plenty of capital spending, there is now a huge base of physical capital and so a slower increase in its size means that investment will go from contributing about 6 percentage points to 4 percentage points of growth.
That leaves consumption as the only driver of Chinese growth with the potential to strengthen. Retail sales in real terms have been resilient this year but the economy’s shift to a consumption-led model is occurring only gradually.
Tot it all up, and China will struggle to do any better than 7.5 per cent growth this year and next year as well – the slowest in more than a decade. “We expect mediocre growth to be the new norm in China,” says Dong Tao, Asia chief economist for Credit Suisse.
The big surprise of the past six months has been the central government’s reluctance to do more to arrest the slowdown. It has allowed the central bank to cut interest rates twice and, at the margins, it has boosted spending on investment and provided more support for exporters.
But it has rebuffed calls for anything remotely resembling the Rmb4tn ($640bn) stimulus package that it unleashed in 2008 to power the economy past the global financial crisis.
Many analysts had expected a more forceful policy response from the government and have had continually to revise down their forecasts as Beijing has stayed on the sidelines.
There are competing explanations as to why it has been so restrained.
The simplest is the current juncture in the country’s politics. In November, the ruling Communist party will convene a congress in which it will unveil China’s new leaders for the next 10 years. Xi Jinping has been anointed to replace Hu Jintao as party chief.
With officials from the village level to the national stage jockeying for promotions ahead of this once-in-a-decade leadership succession, attention has been given over to politics at the expense of the economy. “The policy paralysis due to political struggles this year is the very reason why it might take longer than usual for the Chinese economy to recover,” Lu Ting, an economist with Bank of America-Merrill Lynch, wrote in a recent note.
Another explanation is that the government has come to the conclusion that slower growth is desirable for China. In this view, Beijing has learnt from its 2008-09 stimulus. Although highly effective in propping up growth in the short term, that gargantuan spending effort only made the economy more unbalanced in its reliance on investment.
In an editorial last month, Xinhua, the official news agency, argued that another similar stimulus was “not only unlikely, but would be detrimental to the country’s sustainable growth”.
A final view – and one that raises a more alarming prospect – is that the government’s hands are tied. Even if it wanted to promote faster growth, it would be unable to get much traction. “Imagine the scene when a car is stuck in the snow. The driver keeps stepping on the gas pedal. The wheels move, but the car does not move forward. This car is called the Chinese economy,” Mr Dong says.
This bleak opinion is based on the assessment that private businesses are restricted to a series of sectors such as manufacturing and property that are beset by overcapacity.
Unless the government gives them greater access to state-controlled parts of the economy, such as healthcare and finance, they will be unwilling to increase investment and overall growth will inevitably falter.
In contrast to the central government’s reserve, local officials have been tripping over themselves to announce bigger and bigger investment ambitions. Over the past few months, provincial and municipal governments have announced more than Rmb10tn in spending plans, from more subway lines in the northern city of Xi’an to tourism development in the southern province of Guizhou.
Taken together, these plans have been interpreted by many as a new stimulus for China. But there is a big problem with this interpretation – the yawning chasm between what local governments say and what they can actually do.
Declining land sales have hit their revenues and banks have shied away from lending to them because they are still saddled with debts from the previous stimulus.
There is, however, one scenario in which Beijing would be likely to launch a real stimulus.
“In the event of a sharp deterioration in global demand, we expect the Chinese government to provide additional policy support, both fiscal and monetary,” says Wang Tao of UBS. With total government debt at just about 40 per cent of GDP, it clearly does have the capacity to act.
So while somewhat slower growth might be China’s “new normal”, it is hard to see it getting much worse than that.
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