International | Dec 20 2012
– Chinese economy on the turn
– Exports finally improving
– Property market risks contained
– Intra-Asia trade a big growth driver
By Greg Peel
Signs have emerged that the Chinese economy has finally bottomed out begun a recovery after a long slow-down. The recovery is nevertheless expected to be moderate in Chinese terms from here, and as Danske Bank notes there remains a question as to whether the slow-down through 2012 was structural or cyclical.
If structural, there is no reason to expect a substantial recovery, Danske warns, as any stimulus will fail to boost GDP growth and simply boost inflation instead. However the fall in China's inflation rate from 6.5% in late 2011 to under 2% now suggests the slow-down has largely been a cyclical event.
The greatest fear outside observers have had with regard to a Chinese “hard landing” over the last couple of years have been rooted in a bubbling property market and Beijing's attempt to deflate that bubble. However sales of new homes in China began recovering in May and have continued to do so since, Danske notes. New housing starts saw a sharp decline late last year hence the demand-supply balance in housing has improved substantially and house prices have increased moderately.
There remains an unsold inventory overhang nevertheless, but at least housing construction no longer appears to be subtracting from Chinese growth, Danske suggests, if not actually adding to it.
In the meantime, monetary policy in China has remained largely neutral despite two interest rate cuts in 2012. Stimulus has been provided through infrastructure spending, although there is little transparency on actual size, the analysts note. There is evidence of an impact , however, given a marked improvement in in transport and public utilities. Private consumption also appears to have picked up, particularly in home building materials/furniture, while auto sales have remained subdued due largely to the boycott in place on Japanese cars.
China's export industry has been shattered by falling European, and to a lesser extent the US, demand, yet exports have rebounded significantly through the December quarter as sales to other Asian emerging markets have grown, providing an offset. Imports remain subdued nevertheless, Danske notes, suggesting that inventories are still being cut. This should ease over the next few months, the analysts suggest, and along with improved domestic demand should benefit those exporting to China.
Danske expects Chinese GDP growth to peak above 9% in mid-2013. With new leadership uncertainty now removed, investment should enjoy a boost. There will be a particular focus on accelerating the pace of financial market reform, but by the second half 2013 the impact of recent infrastructure stimulus should start to wane.
With China's property sector now under control, Europe and the US provides the greatest external risks ahead. However the greatest risk for China, in Danske view, is centred in the pace of decline of China's long-term growth potential. Despite its large population, China cannot grow at a rapid clip forever and one day growth must plateau out as China stops “emerging” or “developing” and joins the ranks of the “developed”.
With the developed world still in the doldrums, let's hope there's plenty of growing to do just yet.
For the economists at ANZ Bank, Europe remains the biggest threat for all for the emerging Asian economies, China included.
The good news, ANZ notes, is that as the end of 2012 draws high we're beginning to see signs of a rebound in Emerging Asia. The bad new is that EA also saw strong starts in all of 2010, 2011, and 2012, with European turbulence and subsequent political dithering killing off the recovery each time. Assuming the US fiscal cliff is resolved, 2013 will still be another year in Europe could yet derail a recovery.
In the meantime, demand across Asia is improving in momentum, ANZ notes, beginning in China but now having spread to the Newly Industrialised Economies (NIE) of Korea, Taiwan, Singapore and Hong Kong. ANZ has been forecasting such a rebound since the September quarter. Underpinning the evidence is ANZ's own predictor of industrial production growth.
If the new orders subset within manufacturing PMI numbers are rising against the inventories subset, the flow-through should mean an increase in industrial production two months down the track as producers step up to fill the void, ANZ has found. And this is what is occurring across EA at present.
Exports have also began to grow across the region after a long slowdown, ANZ notes, albeit only by low historic standards so far. China has again led the way but most of the Asian region is following with only Singapore among the NIEs dragging the chain and Thailand among the ASEAN group (Thailand, Vietnam, Malaysia, Indonesia, the Philippines). China is an exporter of mostly finished goods, while other EA nations export goods mostly somewhere along the unfinished supply chain.
What is very noticeable to ANZ, within the Chinese export destination data, is that while export growth has turned positive to most regions, intra-Asian growth leads by a wide margin. The rest of EA is exporting bits to China and China is exporting finished goods back to the rest of Asia, such that growth and demand performance appears to be improving across all of ASEAN and the NIEs. US demand is also finally picking up and while European demand continues to go the other way, the pace of decline has slowed.
“Putting this altogether,” says ANZ, “we see a rebound in Emerging Asian growth”.
If only Europe can remain in its box next year.
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