Despite a number of stimulus measures taken over the past year by the Chinese government — including two interest rate cuts, the reduction of their central bank’s reserve requirement three times since last November and the speeding up of the approval of large infrastructure projects — economic growth has not shown a significant boost. The falling of y-o-y GDP growth to 7.6% in the 2Q12 signals a continuing drift in the expansion of the economy. Both industrial production and nominal retail sales decelerated in y-o-y and on a monthly basis.
Bank lending also declined by 41.3%. Foreign demand also is diminishing, which is affecting economic growth. Shipment contracted in July by 5.8% on a monthly basis while the official PMI fell to 49.2% in August, a nine-month low. The government has recently approved a stimulus package, including infrastructure projects, in a bid to stimulate growth. In view of this downturn trend in economic activities, our estimate for China’s economic growth is reduced to 7.6% in 2012 and 8.0% in 2013.
The Asian Development Bank cut its regional growth rate by almost a full one percentage point after considering the adverse effect of China and India’s economic slowdown on the region’s economies. The chief economist of the Asian Development Bank stated that “in People Republic of China, the investment slowdown and the end of the real estate boom are big factors, while in India the failure to push through promised reforms is harming growth”. Emerging Asia has become increasingly dependent on the Chinese economy and a slowdown in China’s growth would deteriorate prospects for economic growth in the emerging markets of the region. To a lesser extent, China’s slowdown is also affecting economic growth in Latin America, where the export of raw materials and commodities to China accounts for a significant portion of the region’s foreign trade. It is believed that structural changes and a more competitive services sector would be needed for a lasting boost in economic growth.
It is possible that a slowdown in the manufacturing sector will feed through the rest of the economy and affect employment. There has been a continuous decline in new orders and exports since the early months of the year, and the manufacturing sector has had the sharpest workforce reduction in 40 months. The deceleration in trade growth in China last month mirrored developments in the rest of Asia. But its scale has been greater than expected. China’s sales to the EU fell by 16.2% in July. Exports to the US rose by just 0.6 %. Given that the EU and the US are China’s two largest export markets, weak demand in these two major regions will continue to weigh on the growth prospects of the export sector and the economy as a whole. The latest data suggest that along with the anemic earnings reports recently posted by flagship Chinese companies, jobs could be shed in months ahead if the government’s recent efforts to stimulate the economy fail to pay off. These signals might lead policymakers to increase their intervention to support economic growth in the coming months.
However, not all news reports are negative. Despite the central government’s refusal to repeal property market restrictions, and prior to the second interest rate cut of the year in July, new home prices posted a m-o-m increase since May 2011. Although the latest figures suggest that China’s economy is stabilizing, they also indicate that the domestic economy has yet to rebound. Against a background of intensifying growth concerns, in recent months a number of local authorities have announced large scale investment plans that total nearly 19 trillion yuan ($3 trillion). But it is expected that this investment plan will have a moderate impact on the nearterm growth outlook. Unlike the 2008-09 stimulus packages, this time the initiative comes from local governments. There has been no official endorsement of these projects by the central government. Also, most announcements are related to regional economic development in the country’s 12th Five Year Plan or even further into the future, and some of the projects are too ambitious to be feasible. Finally, local governments are facing difficulties with funding current projects, so supporting a new round of significant investment spending will be even more difficult.
According to the National Bureau of Statistics of China (NBS), from January to August 2012 investment in fixed assets increased by 20.2%, y-o-y. Breaking down the total investment figure to the sectoral level, the report indicates that investment in primary industry (agriculture) rose by 31.5% y-o-y, while in secondary (industry) and tertiary (services) sectors investment went up by 22.6% and 17.8%, respectively. Nevertheless, the rate of growth of investment in fixed assets has been diminishing in first seven months of 2012.