International | Aug 15 2011
– Chinese growth would be impacted by a recession in developed economies
– Beijing does not have the same response firepower it did in 2008
– Beijing does have room to ease monetary policy
– China's underlying economy remains relatively robust
By Greg Peel
National Australia Bank economists continue to forecast a gradual recovery in global economic growth ahead, however recent market turmoil suggests the risks to these forecasts are “heavily” skewed to the downside. If developed economies fall into recession once more there will be a significant impact on Chinese growth through trade channels, NAB suggests.
China is currently still powering along at a 9-10% rate of GDP growth, at least up to the last set of data. This is down from double-digit levels earlier in the year but still above the 8% target rate set by Beijing. Despite persistent policy tightening, China has not shown any signs of being brought in for a hard landing.
When the GFC hit in 2008, Beijing moved swiftly into action to boost its domestic economy and thus indirectly shore up its export markets. A huge amount of fiscal stimulus was released from China's excessive foreign reserves, encouraging credit demand which, unlike Western economies, had been limited to that point. China has not exhausted its reserves but there is a lot more debt in the Chinese market now than there was then, meaning that while Beijing can always switch to a looser policy stance in response to developed market recession, it does not have as much room to move as it previously did, notes NAB.
Recent inflation data from China, showing the CPI at a higher than expected 6.5%, has the market concerned that Beijing may yet be forced to tighten policy further. There have been no policy responses to date to this latest inflation number, but this may indicate Beijing is waiting to see what happens in Europe and the US before acting. The good news is that while the CPI might be at a high level, its rate of growth in recent months has slowed, and weaker commodity prices over the past month bode well for further slowing.
Food represents one third of Chinese inflation and the biggest problem has been that of pork prices. Beijing has responded to the problem by releasing pork reserves and introducing subsidies for pig farmers so, weather permitting, prices should begin to ease, NAB suggests.
While the stimulus introduced by Beijing in late 2008 has increased debt in China to much higher levels, its intended purpose of kick-starting China's domestic economy has clearly been producing results. July's retail sales growth of 17.2% year-on-year was down from June's 17.7%, and a little less than expected, but still a solid result. Solid wage growth and ongoing negative real deposit rates should serve to provide ongoing support for Chinese consumption, NAB suggests.
This will be important for Western economies. In the latest round of US corporate quarterly results, sales to China from the multinationals were a stand-out feature of record earnings.
From a seasonally adjusted point of view, China's export growth numbers were flat in July. Lower commodity prices account for some of that result but there were also signs of weaker demand, NAB notes, despite industrial production remaining robust. The manufacturing purchasing manager's index (PMI) for July showed growth slipping to barely perceptible levels but forward orders remained solid, which is encouraging.
There has been building concern with regard to China's level of fixed asset investment, and particularly with regard to speculative property development. Investment growth has flattened in recent months in the face of policy tightening but is still running at a solid 25%. Given the level of debt supporting investment, concern surrounds the potentially disastrous impact of a collapse in Chinese property prices.
The risks are not negligible, but NAB notes property investment accounts for only about 20% of Chinese bank lending, which is a different story to, say, the US in 2007. Also very different to the US (and for that matter Australia in 2007) are the ongoing high levels of domestic savings and low loan-to-value ratios. Beijing's stress testing suggests Chinese banks could withstand a 50% collapse in property prices, and no one is forecasting such a move. Not a lot of detail has been provided by Beijing, nevertheless.
The bottom line is that while there are indeed risks to Chinese growth from a sharp recession in developed economies, the underlying state of China's economy at present should serve to lessen the impact. It is, however, not 2008, and Beijing's potential response is more limited this time around. There is little doubt China will feel a significant impact, but NAB is still forecasting slow growth for the global economy ahead. The risks, nevertheless, remain firmly to the downside rather than upside.
