China GDP Growth hits 3 year low.Saturday, July 14, 2012 5:53
I don’t think it came as a surprise to many that China’s growth figures for the last quarter were going to be low, as the media coverage like As China’s growth rate drops and China’s Growth Slows to Three-Year Low of 7.6% would suggest. Some are taking the extreme view that China is headed (immediately) for the cliff, and then projecting what would happen to the global economy should China slow “too much”.
For me, this time it looks and feels a lot different than 2009, and I do not see this current trend as “THE” one to be necessarily worried about. In fact, were I someone who was looking for a bit of confidence regarding Beijing’s ability to land softly, evidence exists that they are certainly improving. Something that the UBS report UBS China Weekly – Policy Support Helped to Stabilize Growth reflects (email me for a copy).
Released hours after the GDP figures were released, UBS’s Wang Tao offered 12 pages on the wider context of these numbers, and why a collective freakout should be avoided (for now).
Looking at the above charts, which are 2 of more than 15 in the report, you can get a good feel for where changes in China’s economy are occurring and how those changes are different than in 2009 when the global economy bottomed out.
On the left, the big thing to pick out here is that while in 2009 exports fell off significantly, in recent months/ quarters the same has not occurred. Showing that China’s economy has over the last few years decoupled a significant portion its manufacturing economy from the global economy. Once considered a major exposure for China, an exposure that was generally believed could pop the China bubble.
On the right, what you will find is that while manufacturing has largely stabilized the last two to three years, real estate development and infrastructure have significantly fallen off their post-crisis stimulus fueled highs. This should come as no surprise to anyone who has driven through a second or third tier city and see the large number of half completed buildings sitting idle.
A risk to “recovery” in UBS’s analysis:
The answer is simple: if property investment and construction weakened more in the coming months, then it is quite unlikely that China’s growth could continue to recover as we described above without additional policy support. In our above forecast, we have assumed, as we have done since the beginning of the year, that property sales and starts would stabilize sequentially even though still falling y/y, and that growth of property investment and construction would stabilize at the current level.
Which leads me to where this 7.6% is different than in 2009.
In the depths of the 2009 crisis, you did not need to read a news paper or check a stock quote to see that there was something very wrong in China. A simple trip outside mid day would have served well enough (particularly after the 2009 Chinese New Year). The streets were empty of the 10-15 million migrants that live in China’s gateway cities, retail shops were closed, and getting a taxi on a Friday night in the rain was no problem at all. There were almost daily reports of 10,000s of workers being laid off as the manufacturing economy wound down, provincial mayors were sounding the warning bells, and the analysis at the time was that China would be ok because workers could still tend to the family farm.
Now, none of the above applies. The gateway cities are busier than ever, there is no exodus of migrants, and getting a cab mid day is nearly impossible. Trains are packed. Airplanes are packed. And I have not heard of anyone shutting down production in China. Yet
Which could ultimately be a good or bad thing depending on how Beijing looks to tackle the issue of how it is going to grow going forward , and through which economy it will choose to stimulate. If the decision is made to revert back to making cheap crap or to stimulate the real estate sector, then the goal is not to build lasting growth, but to burn cheap fuel. Should China continue to develop policies, regulations, and incentives that are meant to air out the bubbles in real estate and the fragmented cheap crap economy, then I would say that is a good thing. Even if that means in the short term growth figures are less than before.
Something covered by the Guardian article China’s big challenge:
China needs to find a new economic model. Relying on abundant cheap labour, cheap capital and welcoming export markets is no longer a viable road map to the future in a nation where the leadership from Deng’s days on has embraced growth as a political weapon to buttress the party’s claim to power; and where, as a result, materialism rules rather than communism or Confucianism.
That means a sustainable growth rate of 7-8% and a steady move up the industrial value chain while developing the service sector and adequate provision in health, education and pensions. It means mastering the inflation cycle driven by food. Longer term it means getting to grips with the deep weaknesses concealed by the heady growth numbers and the assumption that China is on an unstoppable role to global domination.
Something China’s next leader is certainly preparing his team for.