China’s economic rebalancing has been the main downside risk to global economic activity in 2014, and will probably remain so for the foreseeable future. The industrial production figures for August were the weakest seen since the 2008-09 recession, and they were followed by a statement from finance minister Lou Jiwei to the effect that there would be no change in economic policy “in response to one indicator”.
This echoed Premier Li Keqiang’s recent speech at the summer Davos meetings, which indicated broad satisfaction with the overall thrust of policy. “Just like an arrow shot, there will be no turning back”, he promised.
The possibility of a clash between a slowing economy and a Chinese administration that appears implacably set on a pre-determined course was not what the markets wanted to hear. Many western investors have long been predicting a hard landing for China, and do not need much persuasion to believe that it is finally at hand. But recent data do not suggest that it is happening yet.
The collection of economic activity data published for August were certainly on the weak side. Apart from the industrial production figures, which are normally by far the most reliable single guide to overall activity and GDP, money supply growth was subdued, and there was a sharp fall in electricity consumption. Wei Yao, an analyst at Societe Generale, and a pessimist on China, summarises the data as follows:
The shadow banking system continued to delever, with both trust loans and undiscounted bankers’ acceptances (BAs) showing outright contraction for a second month in a row. The shrinking stock of trust loans is particularly dangerous to property developers and as such to residential investment, whereas dwindling BA financing has probably affected commodity financing and contributed to weak commodity imports.
There is no doubt that the property sector is now undergoing a sharp correction, and that weak demand for commodity imports is having global effects on commodity prices and inflation pressures. To a large extent, this property correction is policy induced, but when it showed signs of getting completely out of control in February, it brought about a significant easing in monetary conditions.
This, apparently, was not considered to be a major change of strategy, just a minor mid-course adjustment. But it demonstrated that the authorities had opted for a long, drawn out economic rebalancing, not a quicker correction that would take GDP growth below the Premier’s 7.5 per cent target for 2014 as a whole.
This still seems to be the case. The “unchanged strategy” described in recent statements indicates a determination to maintain the major economic reforms outlined in last year’s Third Plenum, but only at a pace consistent with the official growth targets.
Even taking account of recent weaker data, it seems that the GDP target for 2014 will still be achieved. The HSBC PMI survey in the manufacturing sector published today did not confirm earlier fears that the economy is falling off a cliff. Furthermore, the Fulcrum “nowcasting” factor model of economic growth in China carries the same message. The model, estimated by my colleagues Juan Antolin Diaz and Ivan Petrella, combines all of the available data into a single index of Chinese activity. It has been successful in tracking major and minor inflection points in activity in real time:
Note that the activity indicator rose from about 7 per cent growth in February to a peak of about 9 per cent in mid year, but it has now dropped closer to 8 per cent. The forecasts produced by the model, which are statistical rather than economic in nature, foresee the activity index dropping further to about 7 per cent by year end, and then edging down to about 6.5 per cent (the model’s latest interpretation of the long term underlying growth rate for China) during next year.
The model also produces estimates for GDP data for specific quarters, and enables us to track these estimates as they evolve through time:
Note that the model indicates that GDP growth in 2014 Q3 has been running at an annualised quarter-on-quarter rate of about 8.7 per cent, which is a little below the highest estimates made earlier in the quarter. It also estimates that the 2014 Q4 figure will be around 8 per cent. This is slower than the predicted Q3 out-turn. Nevertheless, if we translate these quarterly annualised growth rates into a possible out-turn for the entire calendar year, it would be very close to Premier Li’s 7.5 per cent target.
It has taken a lot of fine tuning by policymakers to ensure that growth can attain this figure as the property sector adjusts. It is still very possible that they will eventually lose control of the situation, and suffer a much harder landing than they currently envisage. But that does not seem to be happening yet.
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