Chinese 8% Growth Target Not For 2009, Says Westpac

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By Rudi Filapek-Vandyck

The Chinese central bank will soon announce another interest rate cut, by 26 basis points, but after that it will retain official rates at 5.03% for the foreseeable future (at least for the next 14 months). Don’t expect the Chinese renminbi to appreciate any more against the US dollar; that’ll be a 2010 story. And oh yes, the same goes for the central government’s oft mentioned target of achieving 8% GDP growth; that’ll happen sometime in 2010 as well.

The above predictions are not mine but Westpac’s and Westpac chief economist Bill Evans has used a trip to China in mid-March to back up these predictions. He expects real Chinese GDP growth to average a mere subdued 6.7% for the current year (which in essence implies growth won’t even come near the government’s official target) and the average growth for 2010 is currently set at 7.5%, indicating the 8% target should be expected in the second half rather than the first half of next calendar year.

These predictions are underpinned by negative growth projections for both Chinese exports (minus 21.1% for this year) and imports (minus 26.8%) with both only expected to recover to a still negative 5.2% for exports and a positive 3.2% for imports for the whole of 2010. Consumer price inflation is expected to remain negative for 2008 as a whole (that’s deflation in anyone’s language), while prices for Chinese property are forecast to decline by 3.0% this year and rise by 1% only in 2010.

Evans is by far not the low-marker in the market with these expectations, but his trip to Hong Kong, Shanghai, Beijing and Singapore last month has generated some interesting observations he is willing to share with us. For starters, “overcapacity is a common theme” in China, no matter what sector we’re talking about. And while Chinese authorities’ directives towards local banks appear to have led to increased lending, all is not necessarily working according to text book economics, reports Evans.

For starters, top credit companies in China, such as state-owned enterprises (SOEs), were not necessarily putting the loans they received to work during his visit in March. Instead, reports Evans, these companies opted for depositing back the loans with banks, or to buy equities or commodities including gold. How this is going to help the Chinese government to achieve its 8% growth target remains unclear other than that it probably won’t.

In addition, and confirming similar observations made elsewhere, Evans reports there was no increased loan availability to individuals or small companies, this due to perceived credit risks. In other words: Chinese banks prefer to walk the safe route but those low risk receivers of their extra loans are not necessarily creating the money velocity aimed at by the central government in Beijing.

Two more observations made by Evans deserve a mentioning as well, especially since ANZ bank ((ANZ)) has already expressed its ambition to become a major player in the Chinese banking sector plus because of the ever present problem of non-performing loans on Chinese bank’s balance sheets.

With regards to the first factor, Evans remarks Chinese banks have been doing their best to “squeeze out foreign banking competitors by using ‘cheap’ retail funding sources” and they have been successful with this strategy. Secondly, notes Evans, many receivers of increased bank loans are the so-called ‘dead men’; companies who needed funding to stay afloat rather than initiate new activity.

Meanwhile, unemployment has now quickly ballooned to 40 million people and some of Evans’ local contacts were suggesting the headline RMB 4 trillion government stimulus package is really only RMB 1.2 trillion (5% of GDP) after adjusting for projects already announced, new bank lending and local government initiatives that would still need to find finance.

Evans does report, however, Chinese businesses appear to have “blind faith” in that the government will do “whatever is necessary” to return the economy to 8% growth.

He shares the main concern expressed by China watchers elsewhere in that the government in Beijing seems to rely too much on a recovery in exports to get the Chinese economy back on its desired speed. This brings with it a concern that a genuine switch into developing local demand won’t occur until later and this could mean that a genuine restructuring of the Chinese economy will be delayed.

One logical conclusion to draw from all this is that Chinese growth could well surprise to the downside, unless economic growth elsewhere surprises to the upside.

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