The summer has seen a string of disappointing economic data that has dented optimism about a pickup in China during the second half of the year, according to analysis by QNB Group.
China’s growth rate has been steadily slowing since the start of 2010, but many economists had hoped that the trend would be reversed. However, leading indicators such as weak trade data, disappointing purchasing manager indices (PMIs) and slow industrial production suggest that the deceleration is continuing into the third quarter of the year, despite some efforts at stimulus. However, much of the slowdown is related to external factors and the domestic market remains relatively buoyant, and there is an ongoing boom in the west of the country.
The latest disappointments were the values of PMIs in August. These indices are based on surveys of companies inquiring about trends in factors such as their orders, production and employment levels. Significantly, the official manufacturing PMI fell to 49.2. This was only the second time since February 2009 that it has measured below the 50 point mark, which divides expansion from contraction.
An alternative manufacturing PMI, published by HSBC, has been in negative territory for almost a year, and fell further to 47.6 in August. Worryingly, the PMI component relating to new orders was particularly low and the component relating to inventory reached a record level since the index was launched in 2004. This suggests that the sector is producing well above demand levels and that output is likely to fall further as it will not make sense to continue building inventory.
Other key indicators such as the Business Climate Index and electricity consumption have also been weak. Industrial production growth fell to 8.9% in August, the lowest rate in over three years. Export growth in August was just 2.6% year-on-year. Although export growth was still 7.1% over the first eight months of the year as a whole, this was well below the 20% rate in 2011. The slowdown in exports to Europe over the summer has been particularly acute, owing to reduced demand.
China’s rate of real GDP growth has been on the decline since a recent peak of 12.1% in the first quarter of 2010. By the second quarter of 2012, growth had fallen to 7.6%, the lowest rate in a decade, barring the first half of 2009.
A few months ago, many analysts were forecasting a pickup back above 8% in the second half of the year. This now seems unlikely, and the third quarter GDP is likely to be closer to 7%. Even with some recovery in the final quarter, annual GDP might even slip slightly below the government’s target of 7.5%.
The slowdown is mainly happening in China’s eastern provinces, which are most exposed to exports and the depressed property market. In the first half of the year, Shanghai and Beijing had the slowest provincial growth rates, of 7.2%; the export-hub of Guangdong was only just ahead at 7.4%. By contrast, many of the western and central provinces saw double-digit growth rates, led by Guizhou at 14.5%. This is driven by the relocation of companies west, to take advantage of cheaper land and labour, and by government investment in the underdeveloped provinces.
There are also some positive indicators of domestic demand for the country as a whole. Retail sales were up 13.2% year-on-year in August and, with inflation at just 2%, almost all of this increase was due to higher demand not prices. In addition, PMIs related to the services sector, which is predominantly focused domestically, remain in expansionary territory, in contrast to manufacturing, which is more linked to external demand.
Although the government has made it clear that it intends to support the economy, its stimulus efforts have been more moderate than in 2008-09, when almost US$600bn in new spending was initiated. It is treading carefully to avoid reinflating a property bubble.
Another factor that is leading to a relatively cautious policy response is the upcoming five-yearly congress in October. This will be the start of a months-long period of political transition, as many of the senior Communist Party leaders retire in favour of a younger generation.
The main response has been the fast-tracking of approvals for projects that were already planned under the 12th Five-Year Plan (2011-15) such as transport infrastructure and renewable energy generation. A major package of projects totalling US$160bn, mainly 25 urban rail networks, was approved on September 5th.
In addition, the central bank has eased the monetary environment to stimulate lending—trimming official lending interest rates, from 6.61% to 6% in the first cuts since 2008, as well as bank reserve requirements. The weak economic data in August might encourage further easing.
China’s days of double-digit economic growth seem to be in the past, at least on a national level. It used to be argued that more moderate growth levels would lead to a sharp rise in unemployment, as high growth was needed to create jobs to absorb peasants migrating from rural areas to the cities. However, unemployment is not rising this year, perhaps because population growth and migration rates have eased.
The policies that the new Chinese leadership pursue in 2013 will help determine the new normal growth level for the coming decade, with analysts’ expectations ranging from 6% to 9%. That in turn will have a significant global impact, particularly on demand for commodities such as metals, according to QNB Group. China’s demand for hydrocarbons will remain strong in most scenarios, due to growing electricity usage and growth in car ownership from a low level.
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