Recent production indicators in China have indicated further slowing in its economic growth. These negative signals are partly offset by an improvement in inflation and exports, according to QNB Group.
China’s economic trajectory should become clearer in the next few months and could have a significant impact on the global economy and the GCC. In just a decade, China’s economy has quadrupled in size, to become the world’s second largest, with GDP of nearly US$6trn. The real growth rate during this period has exceeded 10%.
Many factors have contributed to China’s remarkable rise. A series of economic reforms, starting in 1978, legalised private enterprise and attracted foreign investment into export industries. This provided a spark to growth, from a low base, that was then fed by domestic investment in infrastructure and real estate. This dynamic was supported by a demographic dividend, owing to a boom in the working age population and migration from rural to urban areas, supplying industries with cheap and plentiful labour.
However, such high growth rates cannot continue indefinitely. The key question is whether China will gradually ease to a more sustainable growth rate, driven more by consumption than investment, or face a sharper and disruptive deceleration. The later “hard landing” scenario, often described as a prolonged period of growth below 7%, is widely seen as one of the most serious risks facing a fragile global economy.
GDP and Business Climate 2007-Q112
China’s rate of GDP growth has been on the decline since a recent year-on-year peak of 12.1% in the first quarter of 2010. That was a result of government stimulus and monetary easing which enabled a sharp rebound from fall in exports due to the global crisis. By the first quarter of 2012, growth had fallen to 8.1%, the lowest rate in a decade, barring the first half of 2009. Of particular concern was the services sector, which grew at the slowest rate in over two decades.
There have been further signs of weakness from other indicators such as the official Purchasing Managers Index (PMI) which recorded 50.4 in May. This was only narrowly above the 50 point mark which divides expansion from contraction. An alternative PMI survey, produced by HSBC, has been consistently indicating contraction since last October.
Another key indicator, the Business Climate Index, has also been weak and recorded 115.6 in the first quarter, its lowest level since the first half of 2009. Other indicators such as electricity consumption and retail sales have also been weak recently.
Inflation & PMI 2009-May 2012
On the positive side, exports have been holding up better than had been expected, recording a 15.3% annual growth rate in May, more than double the median market forecast.
Furthermore, inflation fell to 3% in May, thanks in part to falling oil prices. This is its lowest level in nearly two years, and comfortably below the official target of 4%. Lower inflation potentially gives the government more room to deploy fiscal and monetary stimulus without causing an upwards spiral in prices.
Indeed, the central bank has already made its first move, reducing interest rates by 0.25% on June 7th, the first cut since 2008. It might look to make further cuts and to reduce bank reserve requirements, both measures aimed at boosting bank lending for investment and consumption, and hence supporting growth.
However, according to QNB Group, there are concerns that there may already have been overinvestment in some sectors, particularly in real estate, with a potential bubble in some parts of the country. Moreover, some companies and local government bodies may have taken on too much debt to fuel the investment boom.
Other government intervention includes subsidies on household appliances to encourage domestic consumption. It should become clearer during the summer whether or not the monetary and fiscal policy measures are able to check the declining growth rate.
China is a significant trade partner for the GCC. In 2011 it was the largest supplier to the region, providing 13.2% of imports, and also rose to become the third largest purchaser of GCC exports, consuming 9.9%. Its importance for Qatar is not as high, as it supplies just 5.8% of imports and purchases 4.1% of exports.
Nonetheless, QNB Group does not expect that a hard landing in China would lead to a substantial fall in its demand for GCC oil, just a declaration in the rate of demand growth. This is because the powerful trend towards increased Chinese car ownership is expected to continue. The ratio of cars to population in China is only about 7%, less than half the global average.
A sharp correction in the construction sector could, however, dent other global commodity prices, such as metals. This would harm metal exports from the GCC, but could also benefit many of the major infrastructure and real estate construction projects underway in the region, by reducing their costs.
Despite its problems, China still remains one of the brightest spots in a gloomy global economy. By comparison, two other emerging giants, Brazil and India, have produced disappointing data in recent months. India’s real GDP growth in the first quarter of 2012 was just 5.3%, and Brazil’s was only 0.8%, as drought devastated its agricultural production. If China were to follow in their footsteps, then the period ahead for the global economy could be even more challenging than currently expected.
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