International | Jul 18 2008
By Chris Shaw
For most economies a fall in the rate of economic growth of 0.5% from quarter to quarter would suggest a substantial slowdown but when growth is still above 10.0% as is the case in China the magnitude of the decline seems far less significant.
Chinese growth in the June quarter declined to 10.1% from 10.6% in the March quarter, an outcome slightly below consensus forecasts of an increase of 10.3%. According to Danske Bank the shortfall was largely the result of weaker export growth, as domestic demand continues at solid levels.
On the bank’s numbers export growth fell to less than 10% in the quarter, which compares to increases of more than 20% through 2007. But as the bank notes the continued strength of domestic demand is clear from the fact industrial production was 16% in the quarter, down very modestly from the 17.2% recorded last year.
DBS points out the slowing in growth was not accompanied by any significant slowing in fixed asset investment, which leads it to suggests liquidity in China remains excessive. This should ensure no easing of inflationary expectations, especially as real interest rates remain at low levels.
Westpac senior international economist Huw McKay largely agrees, pointing out while the headline CPI number fell in June for the second month in a row the PPI or Producer Price Index continues to push higher. Despite this he expects policy makers are becoming less concerned about the inflationary outlook and instead will focus their attention on sustaining economic growth.
Danske Bank shares a similar view and suggests there may be some easing of monetary controls and a slowing in the rate of currency appreciation as the Chinese focus turns to ensuring a soft landing for the economy, which remains the most likely outcome in the bank’s view. Westpac’s McKay agrees the pace of currency appreciation is one policy lever authorities can be expected to examine as the focus shifts to growth. To reflect this Danske Bank has adjusted its 12-month forecast for the USD/CNY rate to 6.53 from 6.44 previously.
As both Danske Bank and Westpac note short-term GDP growth should remain supported as the economy rebuilds after the damaging earthquake earlier this year, McKay noting the efforts and spending in this rebuilding process have contributed greatly to the still high level of fixed asset investment.
Looking ahead to 2009 Danske Bank sees a soft landing as the most likely outcome but suggests this would not be a bad thing as a slowing in Chinese growth, particularly if it came as the result of a slowing in the global economy, would work to make the current expansion more sustainable while easing longer-term inflationary pressures.
In contrast DBS doesn’t expect any easing in monetary policy in the medium-term given inflationary pressures remain elevated, the trade surplus is still large and capital inflows are still strong, though it does agree there is likely some room for growth to be supported by a slowing in the pace of appreciation of the yuan against the US dollar in particular.
On Westpac’s numbers even allowing for any changes in monetary policy Chinese economic growth in 2009 should be around 9.8%, which supports the Danske Bank view of a soft landing as the most likely outcome for the Chinese economy.
