Slower, Yet Promising

Economic figures for the third quarter indicate a further slowdown By Zhou Xiaoyan

Slower, Yet Promising

Economic figures for the third quarter indicate a further slowdown By Zhou Xiaoyan

China’s economy grew 7.4 percent year on year in the third quarter of 2012, slower than the 7.6 percent growth in the second quarter and the 8.1 percent in the first, the National Bureau of Statistics (NBS) announced on October 18.

Growth has slowed for the seventh straight quarter, although it was in line with what economists had predicted for the world’s second-largest economy.

The country’s GDP reached 35.35 trillion yuan ($5.61 trillion) in the first three quarters of 2012, said NBS spokesman Sheng Laiyun in a press conference on October 18.

“The GDP grew 7.7 percent in the first three quarters, and the economy is generally stable,” Sheng said. During the first half of the year, it grew 7.8 percent.

Despite the slide, Sheng said the economy had been stabilizing, especially since September. “We have seen some improvements in the third quarter,” he said.

Total retail sales in September hit 1.82 trillion yuan ($291 billion), up 14.2 percent year on year and 1.46 percent month on month.

Fixed-asset investment rose 20.5 percent year on year to 25.69 trillion yuan ($4.11 billion) in the first nine months, with the growth rate accelerating slightly by 0.1 percentage points from the first half.

Challenged by a sluggish external market and global economic woes, the Chinese Government lowered its full-year growth target for 2012 to 7.5 percent in early March, after its economy grew 9.2 percent in 2011.

The pro-growth policies that China has already rolled out are creating new investment demand that will start showing their full impact in the coming months, said Xu Hongcai, a senior economist with the China Center for International Economic Exchanges, a government think tank based in Beijing.

The GDP is likely to grow 7.7 percent year on year in the fourth quarter and exceed the government’s target of 7.5 percent for the whole year, Xu predicted.

“Judging from macroeconomic figures in the first three quarters, the country can reach its goal of 7.5-percent GDP growth in 2012 without any doubt,” said Wang Xiaoguang, Director of the Department of Strategy and Development at the Economic Research Institute of the National Development and Reform Commission (NDRC). “GDP growth in the next quarter is bound to pick up.”

China’s GDP growth is estimated to be 7.8 percent in 2012 and 8.2 percent in 2013, according to the IMF’s recently released World Economic Outlook.

“Over 7-percent GDP growth is nothingto sneeze at,” said Richard D’Aveni, a professor of strategic management at Dartmouth’s Tuck School of Business. “Reports of China’s imminent demise have been exaggerated.”

SEIZING EVERY OPPORTUNITY: Businesspeople arrive at the Canton Fair on October 15

Having recently returned from China, D’Aveni believes the recent slowdown is a short-term concern and China’s long-term prospects remain bright.

“Everybody’s apoplectic about slowing growth but they’re still growing five times faster than the United States,” he told the finance show Yahoo Daily Ticker.

Beyond that, D’Aveni is impressed with China’s attempt to transition from an exportled economy to one driven by domestic demand. China’s market is the world’s largest and rising incomes will continue to generate demand for goods and services, he said.

“The Chinese Government has many more tools to manage a bubble than we do in the United States or than Japan had when their bubble burst,” D’Aveni said. “They have so much control over the economy they can make it work. You can’t count them out. They will stimulate their economy out of this situation.”

Mild inflation

Inflation in the world’s second largest economy saw a mild deceleration in September.

The Consumer Price Index (CPI), the main gauge of inflation, grew 1.9 percent year on year in September, said the NBS on October 15. The CPI grew 2 percent in August and hit a two-year low of 1.8 percent in July.

Food prices, which account for nearly one third of China’s CPI, rose 2.5 percent in September from one year earlier. Slowing growth in food prices and fewer carry-over effects from last year contributed to the slight drop in inflation, analysts said.

China’s producer price index (PPI), which measures inflation at the wholesale level, dropped 3.6 percent year on year in September. It marked the seventh straight month of decline since PPI fell in March for the first time since December 2009.

Xu Lianzhong, an economist from the price monitoring center of the NDRC, said the data was quite normal and within expectations, signaling that the Chinese economy had started to stabilize.

The second half of this year has seen low inflation. Conditions are ripe for an economic recovery in the last quarter, supported by the easing of fiscal and monetary policies since the second quarter, according to economists.

“The data indicate that inflation has been significantly weakened in China. Meanwhile, domestic demand still remains low, which means that further policy loosening is needed in the Chinese economy,” said Liu Ligang, an economist with ANZ National Bank Ltd.

According to the NBS, the nation’s CPI grew by an average of 2.8 percent year on year in the first nine months. Liu said he believes the country is poised to meet its target of keeping inflation under 4 percent for the year.

Liu said that as inflation lessens and the economy faces downward pressure, cutting the reserve requirement ratio of banks is still needed to spur the economy for the rest of the year.

However, some experts held a different opinion, suggesting any further loosening of monetary policies may lead to side effects, like a rebound in housing prices that the Central Government is trying to avoid. Also, China is facing the danger of imported inflation after a new round of quantitative easing (QE3) was rolled out in the United States.

Although the country’s economy, especially its industrial sector, is faced with increasing deflationary pressure, Xu does not expect huge stimulus measures to be issued within the year. On the other hand, fine-tuning fiscal and monetary policies could be possible.

Alaistair Chan, an economist with Moody’s Analytics, a division of Moody’s Corp., agrees with Xu.

Mild inflation in September is unlikely to give the government much scope for further stimulus actions, said Chan.

Chan noted that inflation in housing and household goods has been resilient, and the likelihood of further interest rate and reserve ratio cuts has been diminished.

In order to buoy growth, the central bank has cut the reserve requirement ratio twice this year. It has also lowered the benchmark interest rates twice.

E Yongjian, a researcher with Bank of Communications, also said that it has become less necessary to lower the reserve requirement ratio or interest rates than it was during the rest of the year, as M2 growth expanded at a record speed in September and current inflation stands at a low level. M2, which measures cash in circulation and all deposits, rose 14.8 percent year on year in September, marking the highest level since July 2011, said the central bank on October 13.

“September’s monetary data shows that credit and bond issues have already been relaxed to support economic growth,” said Huang Yiping, chief economist for emerging Asia at the investment banking division of Barclays.

Huang said a further interest rate reduction in the last three months of this year has been constrained by concerns about a rebound in property prices.

Analysts say that the CPI was unlikely to see a significant rebound in the rest of the year, but China should be prepared for socalled “imported inflation” caused by the new round of QE3.

“QE3 will lift commodity prices. The price increases will be passed on to China because the country is a huge importer of commodities,” said Zhuang Jian, senior economist at the Asian Development Bank, China Representative Office.

“If the rebound continues, we think policymakers are likely to lean more toward a‘wait-and-see’ approach, especially in the absence of signs that employment is deteriorating,” said Helen Qiao, a senior economist with the Morgan Stanley Asia Ltd.

Mixed messages

The gloomy global economy dampened the China Import and Export Fair, or Canton Fair, a barometer of the country’s foreign trade situation. The event is held twice a year, in spring and in autumn. This autumn’s fair is being held from October 15 to November 4, in Guangzhou, capital of south China’s Guangdong Province.

The opening day of the Canton Fair saw fewer people in attendance due to a lackluster global trade situation. “This is the most sluggish Canton Fair I’ve ever seen,” said Liu Fengyi, Board Chairman of the GongChang Technology Co. Ltd.

Liang Huan, a sales assistant for an energy-saving lamp company from Hangzhou, said this year her company’s business is not performing as strong as last year.

“Our major markets are in Europe. The European debt woes are having a direct impact on our orders,” she said.

Qiu Zhen, a sales manager for a Qingdao factory that makes solar-energy street lamps, said that the anti-subsidy investigation against China’s solar industry has hurt her company’s business.

“Now we are diverting our efforts to another kind of lamp, which is unrelated to the solar industry,” she said.

Forecasts for the number of participants, including buyers and exhibitors, as well as turnover, are “not optimistic,” said Liu Jianjun, a spokesman for the Canton Fair.

Liu attributed the situation to flagging external demand, rising trade frictions, the appreciation of the yuan, and seasonal factors.“Importers from emerging economies, such as Latin America and Africa, tend to purchase extensively in the spring session. And the strained Sino-Japanese relationship also took a toll on bilateral trade,” Liu said.

September’s macroeconomic data offered some comfort to Chinese authorities.

China’s exports and imports picked up in September but a strong rebound in foreign trade in the near future is seen as unlikely, say analysts.

Exports rose 9.9 percent year on year to $186.35 billion in September, according to the General Administration of Customs (GAC) on October 14.

September’s export volume hit a record monthly high, and growth was higher than the 2.7-percent year-on-year increase posted in August, the GAC said.

The growth in September reflected the runup to the Christmas and New Year holidays, said Zhang Yansheng, an international trade specialist. But as the euro zone debt crisis continues to fester in Europe, China’s largest trade partner, and recovery remains slow in the United States, the fundamentals that affect China’s trade situation are unlikely to improve anytime soon.

The easing of policies by foreign governments and orders for the Christmas shopping season have driven up exports to developed economies, said Chen Hufei, a financial researcher at the Bank of Communications.

Li Jian, a foreign trade expert at the Ministry of Commerce’s research institute, said China’s own efforts to help trade firms reduce transaction costs and improve efficiency also contributed to the recovery.

To boost foreign trade, the State Council in September issued a batch of measures, including speeding up export tax rebates, reducing administrative costs for companies, lowering financing costs for small and micro-sized companies and increasing credit to exporters.

Also, some exporters may have hurried to deliver their orders before the eight-day National Day holiday (September 30-October 7) and caused the higher growth in exports in September, Li said.

Three months of consecutive drops in imports ended in September. Imports were up 2.4 percent from a year earlier to $158.68 billion, according to GAC data.

Chen said import demand has built up on China’s pro-growth policies and will continue to increase in the fourth quarter.

Chinese authorities have beefed up incentives to expand imports in order to balance the country’s trade.

The government said in early October that it would allocate 2.5 billion yuan ($399.5 million) from the central budget to offer lowinterest loans to importers of certain products this year.

In September, China’s trade surplus rose slightly to $27.67 billion from $26.66 billionin August, the GAC said.

China’s Foreign Trade Surplus ($bn)

Li predicted that the trade surplus will expand somewhat, but will not take up a larger share of China’s total trade or economic output.

Wang Jun, an expert with the China Center for International Economic Exchanges, forecast“relatively severe difficulties” in China’s foreign trade for the next one to two years.

In the longer term, China is not likely to maintain the annual export growth of 20-30 percent seen in previous years because global demand simply cannot support it, Wang said.

Instead of relying entirely on external markets, China should strengthen its export industry by offering more tax rebates, cutting logistics costs and raising the efficiency of labor, he urged.

“Despite upbeat foreign trade figures in September, a rebound in China’s exports has yet to take hold,” said Liu. “We’ll wait and see how foreign trade develops in the future. The Chinese Government’s pro-growth policies in foreign trade will be tested at this year’s Canton Fair.”

Tasks and risks

China is at a crossroads and is confronted with a number of challenges, including sustaining growth, shifting the focus of its economy and curbing inflation, said an analytical report on China’s macroeconomy, released by the Institute of Economic Research at Renmin University of China on September 22.

“Market-oriented economic growth and sustaining growth by structural adjustment should be the top choices for the country,”said the report. “Meanwhile, further urbanization and industrialization are feasible ways to realize those goals.”

“In the short run, sustaining growth should be the top priority,” said Wang Yu, Deputy Director of the Research Bureau of the People’s Bank of China, the country’s central bank.

“However, in the long run, pushing forward economic reform is most important because long-term economic development depends on how well reforms are carried out in the country,” Wang said.