International | Oct 21 2008
By Andrew Nelson
We all knew it was going to happen, but now it’s a fact, the Chinese economy is starting to slow and the slowing is more than expected. Yesterday’s data from the Chinese government show Q3 GDP growth has dropped to 9% year on year, with a slowdown in industrial activity and export growth the main culprits.
The read is much lower than the preceding quarters of 10.6% and 10.1% and shows declines across the four major segments of the economy, namely investment, consumption, exports, and government spending. Economists at Standard Chartered point out that sectors such as steel production, car sales, air travel, and real estate have all experienced their worst quarters in years. And all of this was only made worse by the short-term artificial slowdown in the industrial sector brought about by the Olympics.
Numbers from Danske Bank show that growth in industrial production in September declined to 11.4% year on year from 12.8% year on year in the previous month, although economists there are expecting a slight rebound in industrial production from a post Olympics bump.
But all in all we’re looking at the lowest quarterly GDP growth rate since Q203 when it hit 7.9% year on year and Standard Chartered economists are expecting further weakness in the near term. While the full year growth rate should come in at around 9.6% given growth has averaged 9.9% so far this year, according to their numbers we should hit 7.9% in 2009 and 7.1% in 2010. If true, that’ll be a far cry from the 11%-plus figures we all got used to in the years past. The economists still caution there remains risk to the downside.
Danske economists are picking 8.5% by mid-2009, but also warn there is significant downside risk to their numbers given the sharp drop in GDP and industrial production numbers. Anything below GDP growth of 8% means hard times for China so if Standard Chartered is correct in its assumptions the next two years could be very hard for China, and for anyone dependent on the country.
The GDP read didn’t arrive by itself, as the Chinese government released a basket of economic reads and they weren’t all bad news.
Consumer price inflation continued to decline, with September CPI slowing to 4.6% year on year from 4.9% in the previous month. Danske notes that while easing food prices continue to drive headline inflation lower, there are now signs that easing of inflationary pressure is becoming more broad based. Lower commodity prices are also expected to help drive down producer price inflation, which declined to 9.1% year on year from 10.1% in the previous month.
Retail sales were also strong, increasing 22% year on year in September and drawing a stable picture for private consumption while being boosted by the decline in consumer price inflation.
Danske thinks the next move for China will be to further ease monetary policy through removing remaining credit quotas and cutting interest rates now that the diminishing threat of rampant inflation has removed itself as a major constraint on monetary and fiscal policy.
Standard Chartered agrees on this point, saying the composition of the government’s Work Plan indicates that China seems to have moved on monetary policy, with no more loan quota and lower rates to come. It’s important to note that as yet, the Chinese government has made no mention of any sort of fiscal stimulus package, and has in fact said it should be conserving resources, not spending more.
One thing that was missing from the discussion was any evidence that Beijing would be looking at any significant stimulus policies for either the residential and commercial real estate sectors other than lowering transaction fees and taxes.
While China’s headline trade surpluses also remains quite large and seem to be showing little ill-effect from the global downturn, export growth has been decelerating. Standard Chartered sees this as a result of a strengthening Chinese yuan (CNY), which boosts the value of the Chinese exports when translated back into CNY.