International | Sep 22 2008
By Andrew Nelson
With a visible weakening in China’s economic backdrop and a government cutting interest rates on concerns about inflation, is it time to start wondering whether the China boom is over. Standard Chartered, for one, thinks that call is still a long way off, citing the structural drivers for China’s economy such as continued urbanisation, strong productivity growth, and a rising consumer market.
Granted, the economy has slowed, sharply in Q3 2008, with the bank noting that present difficulties far surpass what could have been caused by the much discussed Olympics slowdown and a few temporary factory closures. The real estate sector is faltering, electricity demand is weak, car sales are down and the stock market continues to fall.
While the bank expects the Chinese economic slowdown will continue into 2009, so far, the consequences for growth are unclear, as is the direction of the central autorities’ strategy. The bank notes inflation and the threat of an unsustainable relation will be a key concern of the central government, with policy debate almost certain to become more intense, especially given the current push for a conservative approach to fiscal stimulus.
Other key factors for consideration will include growth and spending, which are prime focus of provincial governments. However, with national leaders looking through some very unclear data at the present time, a clear direction – in terms both of where the economy is actually going and what the government intends to do – isn’t expected until the arrival of Q3 data out in October.
Standard Chartered cautions this will only be the starting point for official discussion, with the actual shape of the nation’s strategy not expected to crystallise until the Central Economic Work Meeting, which usually takes place early in December.
Until then, it’s sit back and wait. The bank is little alarmed at the Chinese nation’s prospects, recommending investors worry more about the US financial system.
Taking a bearish stance, the broker is factoring in a weak Q3, with a slowdown in fixed asset investment, weakening consumption and much slower industrial activity already evident from August data. Nonetheless, Standard Chartered still expects GDP growth to remain above 9% for the rest of the calendar year.
Ok, this can’t be sustained forever given weakening conditions and the bank agrees, predicting a continued slowing for 2009 and 2010 GDP growth. Its forecast is down to 7.9%, and it is looking for 7.1% in 2010. This would see a slowing in real investment to 10.1% and 9.6% respectively, but the bank points out it could be worse if the private sector does not respond to cheaper and easier to get credit.
This is a risk, as the bank predicts household consumption will continue to slow as the housing market continues to decline, while expected weaker wage growth in the export sector will eventually lead to weaker rural consumption. However, there will be some support from extra public spending and the acceleration of state-sponsored projects, as Beijing looks to throw more money at major infrastructure projects to keep things moving.
After the surprise loan rate cut on September 15, Standard Chartered is now expecting three more cuts in the short to medium-term, bringing the one-year loan rate down to 5.85% by mid-year 2009. These cuts will most likely be accompanied with deposit cuts, the bank predicts, meaning Chinese banks’ interest rate margins will be squeezed pretty tight.
However, Standard Chartered notes that while the People’s Bank has been consistent in retaining its hawkish stance on inflation, it is still wary of a relation of the economy similar to the US after it slashed rates in 2001 to deal with the tech market crash. This is getting us into the position we are today. The economists point out this caution is evidenced by the September 15 decision, given the central bank did not reduce long-term and mortgage rates, provided no future guidance on real estate policy, or reduce the reserve requirements of the nation’s five largest banks.
All in all, everything falls back to the shape of Q3 data and the shape of the global economy over the next few months. This should tell us how China will respond to the US financial crisis in setting its own policies and what direction domestic growth and inflation might take into 2009. Stay tuned. More insights about all this from October onwards.
