International | Jul 16 2009
By Greg Peel
China’s annual real GDP growth rate peaked at 13% in 2007, hit 6.1% in the first quarter 2009 and has now bounced back to 7.9% in the second quarter. Australia, which rides on China’s coat tails, hit a peak of 4.2% in 2007 and dropped to 0.4% by the first quarter 2009. The US, which was China’s biggest export customer during its boom, managed only 2.8% in 2007, down to negative 2.5% in the first quarter 2009.
Clearly China’s economy is a volatile one. Indeed, in its initial emergence out of the communist darkness in the nineties, China’s economy suffered a spectacular cycle of booms and busts. Its most recent export boom of 2003-08 found a new peak, and in early 2008 many in the world assumed China’s ongoing industrialisation and urbanisation would be enough to offset the credit-bust downturn in the developed world. This view proved optimistic, and as demand for Chinese exports dried up across the globe, China, too, suffered a bust of sorts. At least from 13% growth to 6% growth. To Australians, 6% growth still seems boom-like, but the reality is China’s economy needs to grow at around 8% just to provide enough employment for its growing population. Thus anything under 8% growth in China is considered a recession.
But here we are back at 7.9% growth for the second quarter. The number is not quite in excess of 8% as some investors had hoped, but it still beat consensus economist forecasts in the 7.5 to 7.8% range.
This number is important, because (assuming it’s genuine) it provides a level of confirmation that recent extraordinary Chinese raw material exports are not just smoke and mirrors. It was not a great surprise that China should begin to buy a lot of iron ore, copper and other commodities when prices hit their spot market depths late last year. Chinese stockpiles had been run down, and restocking at low prices made perfect commercial sense. But by the time iron ore imports hit new records – boom times included – in the first quarter ’09, the world began to wonder just what on earth was going on.
Restocking assumptions morphed further into suggestions that the Chinese government was using the opportunity to top up strategic reserves – again a sensible ploy. Or perhaps China had decided to buy real commodities instead of the US Treasury bonds it had previously invested all its foreign currency receipts into. That also made perfect sense, and tied in with the strategic reserve concept anyway.
But record iron ore imports? At a time when China was about to renegotiate its annual iron ore price contracts? Surely there must be more going on.
The obvious answer was Chinese government stimulus. The US government may have thrown trillions at its own economy, one way or another, but the US$600bn fiscal package China pledged to drive infrastructure investment and thus its otherwise sluggish domestic economy (as opposed to its export economy) was not to be sniffed at either. Initially, however, economists remained sceptical as to whether the package could really have much of an initial impact, and were certainly not convinced it could single-handedly turn around the entire global economy in a heart beat. More bullish commentators were nevertheless a lot more optimistic.
So massive Chinese commodity buying was then justified as “real” because commodities honestly are needed for the purpose of an enormous infrastructure drive. The fear was China was only stockpiling commodities, and would eventually stop buying when it had enough. Somewhere in between lay the truth. China may have been restocking, and may have chosen to buy commodities instead of US bonds, but it also might be using those stockpiles up fairly quickly.
The answer would lie in whether or not China’s GDP growth rate showed commensurate improvement. If not, then perhaps stockpiling was merely that, and Chinese commodity traders who had jumped into the middle of the market would be left high and dry.
And today we had the proof, it would seem. A growth rate of 7.9% is pretty damned impressive.
According to not necessarily reliable data acquired by Standard Chartered, the number of new construction project starts in China rose in May to 37,458. How does that make the NSW government feel? And these are deemed to be only the “easy” projects that could be started straight away. The second half of the year is expected to see the first concrete poured for more ambitious projects. Anecdotal evidence from Australians returning from fact-finding missions in China suggests you can’t move anywhere, in any city, for the cranes. The world remembers just what lengths China went to during the preparation of Beijing for the Olympic Games. Rumour has it the budget for the preparation of Shanghai ahead of the World Expo next year is even greater.
Perhaps the world was wrong to believe the stimulus of China’s domestic economy would take some time. If this is the case, then the signs bode well for the global economy, and particularly for commodity exporters such as Australia.
But when it comes to China, there is an ever-present risk, and that is that once again things will happen too fast. From the eighties to now, China has ever so slowly been bringing its financial system, monetary controls and market regulations into line with those of developed economies. There is nevertheless still some way to go. Chinese authorities do not want to perpetuate earlier cycles of boom and bust, but nor do they want to kill off economic growth altogether by moving too quickly on policy. While substantial steps have now been made, economists are beginning to worry once more that China might already be bubbling again.
Standard Chartered and Citi, to name two research houses, have this week both offered reports noting a big jump recently in China’s reserves of foreign currency. The second quarter added US$178bn to reach US$2.13 trillion. In theory, the near collapse in China’s export market as a result of the GFC should have had a meaningful impact on reserves. China is still exporting, so reserves should grow, but not by anything like the numbers achieved in the boom. Accounting for both an increase in trade surplus, and the level of regulated foreign direct investment into China over the period, there remains another US$122bn unaccounted for. Where did that come from?
The analysts agree – it is probably “hot money”. This is foreign money flowing into China on a speculative basis, looking to take positions in stocks, property and other investment assets.
Hot money became a real problem for Chinese monetary authorities in the boom. It was simply not welcomed. Irrespective of what assets that money was invested in, the simple play was basically a currency one. The renminbi is pegged in a range to the US dollar – a range which the Chinese quietly adjust when deemed appropriate. As the trade imbalance between China and the US grew out of control in the boom, foreign speculators were assuming – correctly – that China would continuously allow the renminbi to appreciate. Simple purchasing power parity suggested the pegged renminbi was undervalued by as much as 40%.
But hot money inflows were only making the problem worse. In the end, however, along came the GFC. Most recently, China has been devaluing its currency as a means of halting the slide in economic growth, along with lowering interest rates and encouraging rampant credit growth. China has been implementing its own means of monetary stimulus, along with its fiscal stimulus of US$600bn.
The US has been throwing trillions at its economy, as noted. Yet it appears the US economy is still contracting, although the Federal Reserve is convinced a return to positive, albeit sluggish, growth will be achieved in the second half of this year. By contrast, China’s GDP has just leapt to 7.9%.
Do the Chinese authorities now have a new problem on their hands? They’ve seen this movie before.
It is of little surprise hot money is flowing into China. Watch any US business channel and you will see fund manager after fund manger advising to invest in China, invest in the BRICs, invest in the commodity countries. That’s were the growth is. The developed world still has overhanging credit issues to deal with. But with massive fiscal stimulus, loose monetary policy and now hot money inflows, the risk is China is witnessing the beginning of fresh bubbles in the stock and property markets and other assets. The Chinese domestic stock index is already up over 50% from its November lows.
Chinese domestic bank loans are currently up 34% year on year. As previously noted, construction projects have been encouraged and are popping up like mushrooms. The government is pouring money through the banking system and into infrastructure. Interest rates have been lowered and the renminbi has been depreciated. Unemployment has stabilised. China’s export market has also stabilised and is quietly growing again. Growth will only continue, one presumes, if developed world economies can actually begin to get back on their feet. Monetary stimulus, fiscal stimulus, direct foreign investment, and now hot money are all conspiring to send China into another uncontrollable boom.
From Australia’s point of view it is hard to look a gift horse in the mouth. But analysts agree – China now has to look at reining in its policies or another runaway boom might portend an inevitable bust.
Apart from the better-than-expected 7.9% improvement in GDP during the second quarter, the National Bureau of Statistics (NBS) today also announced urban per capita incomes were up 11.2% from a year earlier and real rural per capita incomes were up 8.1%.
Meanwhile, China’s consumer price index fell 1.7% in June compared with the same month a year earlier. Industrial output – a measure of activity in the nation’s factories and workshops – grew by more than 10% year on year in June. Urban fixed asset investment – a measure of government spending on infrastructure – rose by more than 35% over the same period.
China’s retail sales in the first half year rose 15% to 5.87 trillion yuan (US$859.60bn) from a year earlier, according to a release by the National Bureau of Statistics (NBS). The growth rate was 3.7 percentage points higher than the same period last year. Retail sales in June also rose 15% from May.
Real (inflation-adjusted) retail sales growth was recorded at 16.6% in the first half year. Urban sales of consumer goods expanded 14.4% to 3.98 trillion yuan, while sales in rural areas increased 16.4% to 1.89 trillion yuan.
The NBS stated an economic recovery was not yet assured.
