International | Nov 20 2008
By Chris Shaw
The combination of tighter government policy and the global economic slowdown has been enough to put the Chinese economy under pressure, with Standard Chartered noting this has been enough to see both real investment and consumption growth slow.
The manufacturing sector has taken most of the weight of this downturn, a not surprising fact given on the group’s estimates two out of every five factories in China produce goods for the export market. As new orders have fallen so too has employment, while raw material inventories are trending higher.
Profitability is also slowing and this is dragging down private investment, though as Standard Chartered notes it remains too early to know just what impact the government’s stimulus package will have on the willingness of the private sector to lift investment.
Recent data show this too is weakening, with construction spending falling on the back of tight development controls, tight lending quotas and a lack of cash for developers.Growth in machinery imports has also slowed modestly but the group notes in this sector there are still signs of additions being made to capacity.
This will be crucial as the group notes 42% of all Chinese spending in 2007 was investment related, while consumption accounted for 35%. The group expects consumption to remain at similar levels over the next few years, meaning the impact on investment from the stimulus package will be the key.
As investment has slowed the overall economy has slowed with it, with growth now down to around (an estimated) 7.5%. The group notes this has been enough to prompt the government to introduce more stimulatory policy initiatives along with its financial package, the changes taking the form of an easing of credit controls and a relaxing of quotas.
This has been made easier as the previous concerns over inflation have now been put to rest thanks in part to the recent falls in commodity prices. Looking forward the group expects a further five cuts in official rates this cycle, while it sees China as most likely to export deflation rather than inflation to the rest of the world in coming months.
One positive the group notes is the OECD’s China Leading Indicator shows forward momentum remains strong, which it points out means the Chinese economy will continue to grow at a faster rate than many other economies in 2009 even though its rate of growth will be down from previous highs.
On the group’s numbers the economy will deliver growth this year of 9.6% but this will fall to 7.5% next year (below the crucial 8%), with risks to the downside for its forecasts in both years. In 2010 the group expects a global recovery to emerge and as this improves demand for Chinese exports the Chinese economy will benefit along with the rest of the world. While this should lift GDP growth to 8.5% in 2010 the group doesn’t expect a return to growth levels of 9% or more until 2011.
In the meantime the appreciation of the Chinese currency is likely to continue given the country’s trade surplus is currently at record levels and there is scope for the imbalance between this side of the economy and the domestic side to increase further. As well, the group sees increased risk for a new US administration to call the renminbi a “fundamentally misaligned “currency.
In terms of China’s impact on metal markets Standard Chartered notes steel consumption in year-on-year terms fell by 4% in the September quarter, its first fall in nine years. With housing, auto manufacturing and ship building all trending lower the implication is weaker demand for steel going forward.
This also implies a corresponding weaker demand for bulk commodities, while base metals are also suffering from rising inventory levels and this means the market shouldn’t look to rising commodity prices from a turnaround in Chinese demand anytime soon.