International | Nov 13 2012
– China prepares for new leaders
– Growth slowdown may be levelling
– New leaders unlikely to be aggressive
– Priorities may change
By Eva Brocklehurst
As China's impact on the global economy increases sharply, analysts are keenly watching the political state of play. By November 15, at the end of the current Communist Party congress, a new leadership will emerge. What was once a dry and secretive change of officials is now reported globally, from a desire to see what implications there may be for financial markets. Citi analysts suggest that Chinese leaders are aware of the challenges China is facing and, for markets, it will be a matter of what level of political action ensues to manage the economy.
China's economic growth rate has a big impact. According to CIBC Markets, China's share of global copper demand has trebled in the last decade, while its share of oil demand has nearly doubled. The economists conclude that 8-8.5% GDP growth is likely to have the same incremental effect on demand as a double digit increase might have had a decade ago. They estimate real GDP is likely to rise by about 7.6% this year, slightly below the consensus. That may accelerate to 8.1% in 2013 and 8.5% in 2014 but still well below the past decade’s 10.5% average rate.
Recent indicators have pointed to a bottoming of the slowdown. Industrial production expanded at a firmer 9.6% rate year-on-year in October, with retail sales and fixed investment also showing signs of improvement. Another interesting statistic CIBC mentions is that, per dollar of GDP, China’s economy is ten times as metal intensive and 3-5 times as energy intensive as the advanced economies. Slightly slower growth but still buckets of demand for resources,so it seems.
However, caution is warranted. CIBC notes the country's demand for metal has mainly been driven by infrastructure spending and this has coincided with political leadership cycles. Historically, officials have undertaken new projects early in their tenure, with an eye to future promotion. This time the new guard may be more circumspect. CIBC sees the broad direction of policy continuing to be set by the current 5-year plan, which remains in force through to 2015. Compared with the economic medicine handed down four years ago the efforts to address the current economic slowdown have not been so aggressive. CIBC said September's RMB1 trillion stimulus program, centred on infrastructure, was only a quarter the size of the one launched four years ago.
The response of monetary policy has also been muted. The People's Bank has cut the one-year lending rate by about 50 basis points from its peak. Last time, it cut by over 200 bps. Reserve requirements for large banks have been cut by 150 bps, also less than in the last cycle. There are fears this time of rekindling housing inflation while there are higher levels of public/financial sector indebtedness than four years ago. CIBC notes China's gross public debt-to-GDP now stands near 50% (including local government). That is higher than a number of other key emerging markets, including Turkey and Russia.
Citi also expects reforms will be modest and slow to eventuate and notes, from the opening remarks, that the Communist Party aims at doubling 2010 GDP by 2020 in real terms, implying 7.2% annual growth. This is a conservative target, according to Citi, and leaves room for rebalancing. Ten years ago the current leadership aimed to quadruple 2000 GDP by 2020. They achieved it by 2011. Moreover, a call to double household income in a decade is also not seen as terribly new. It echoes the previous call from the twelfth 5-year Plan, that household income growth should not be slower than GDP growth. Industrialisation, IT, urbanisation and agricultural modernisation have been the four areas highlighted to achieve sustained growth. Here, Citi sees the potential lies in fostering domestic demand and improving productivity.
In his opening speech, outgoing President Hu Jintao singled out environmental conservation as an important area for reform. Citi notes that China produces about one fifth of the global manufacturing product but consumes about 40% of the world's resources. The analysts see this official emphasis as flagging policies such as carbon emission control and more efficient resource allocation. Despite a speech that called for wide-ranging reforms, Hu Jintao was also careful to stay connected to the past. Citi notes he reiterated a middle path in political reform – neither developing as a rigid and closed economy nor building a capitalist state – and most of the government's work in the near future will be about getting its priorities right.
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