Henry Hopwood-Phillips 3.44pm
Economic data from China is mixed. The bad news is that after first-quarter GDP growth of 8.1 per cent, second-quarter growth is being revised downwards from 9.5 per cent to 7.8 per cent by Caixin, one of China’s leading financial publications.
Reuters reckons second-quarter growth will fall even further, by 7.6 per cent, the weakest rise since 2008. Other indicators fare no better. Industrial production has risen by the lowest amount in three years, at 9.6 per cent. Electricity consumption fell to 3.7 per cent from 7 per cent in March. Property prices fell in over half of China’s seventy leading cities. And manufacturing PMI suffered its eighth consecutive month of contraction, from 48.8 in June to 41.8 in May.
The second set of statistics paints a rather different picture. Exports were expected to clock a 6.8 per cent rise but instead surged by 15.3 per cent to $181.1 billion, mostly due to American demand. Not only that, imports only increased 12.7 per cent, giving a healthy trade surplus of around $18.7 billion. One of those imports was oil, which was bought at a record rate of six billion barrels a day in May due mainly to its low price and unstable future.
Bears point to a real estate bubble, over-capacity, over-investment, and a consequent lack of inflation as signs of over-extension. Bulls tend to side more with Jim O’Neill of Goldman Sachs who notes that the historical weight placed on production stats is misplaced and that “indicators of consumption are becoming more important”; and Jack Perkowski of Forbes who reckons “the phrase ‘property bubble’ will no longer be in the vocabulary” reasoning that it must have bottomed out after nine-months of decline.
The Chinese government, noticing a slow-down in demand, has not been slow in reacting. It has cut its interest rates for a second time. Consequently the yuan weakened against the US dollar in Shanghai.
Further measures are also being taken. The monetary authority is pumping 225 billion yuan into the financial system by conducting reverse-repurchase operations. The last steps to lower the amount of cash banks need in reserve, started in November and freeing up 1.2 trillion yuan for lending, are being implemented. And investment projects, many in the underdeveloped interior and western parts of the country, are being fast-tracked.
Beijing also hopes to boost energy demand by subsidising energy-saving white goods to the tune of 26.5 billion yuan. Such measures make a mockery of bullish claims that the Chinese government would intentionally try to cool the economy down in order to tactically restructure it.
China knows the oil that lubricated the post-war global economy is running dry. As the purchasing power of the Western consumer, based at first on rising wages but later on rising house prices has evapourated, no significant replacement has compensated for that lost demand. According to Bloomberg’s David Roseberg over 80 per cent of the world’s top economies are now posting a contraction in industrial activity. The EU and US together account for approximately 40 per cent of Chinese total exports but China knows that its long-term future lies with its own domestic consumer. This is why it has not been afraid to upset the laissez-faire apple cart by playing dirty with its currency, by using state funds to stockpile underpriced rare earths whilst imposing quotas and caps that ensure they remain in its domestic market, by refusing to “save” the eurozone, and by imposing duties worth £2.1 billion on US-made cars.
But the long term is naturally a long way off. Though there is talk in some quarters that the West needs to restructure its economy from a consumer-driven to an export-based one and that China needs to do exactly the opposite, the fact remains that the Chinese, with no real welfare state to speak of, are driven by both economic necessity and to a lesser extent culture, to save and supply rather than consume and demand. The West also has a tendency to overlook the old cronyist fundamentals of the Chinese economy which ensure the masses have little option but to stash their cash.
The fact is that much of the economy is still run on political rather than economical capital and that many bad debts are still sloshing round the system. Current generations are also living with the repercussions of the one-child policy legacy left to them by Xiaoping in 1979. They must save because demographically fewer and fewer people must support an ageing 1950s baby-boom generation.
In the short to medium-term the Chinese middle classes are not going to be either big enough or rich enough to fill the demand gap left by western homo consumericus and that gap remains unfilled by both BRIC and MIKT countries. This is the biggest single factor in the Chinese growth slow-down from averaging 10-13 per cent in the past decade to more humble 8-9 per cent IMF predictions this year.
But the Chinese have so far refused to invest in European customers who live in a eurozone that, according to Jin Liqun, Chairman of CIC, they believe to be profligate, lazy and politically undecided. China wants a eurozone to rise in its own image, with a freer market at ground level and a more centralised political command.
However, both seem unlikely to materialise and so, ceteris paribus, until one side blinks the economic stalemate looks set to continue.
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