Approaching the end of the first half of the year it’s clear that China’s economy is firmly in a period of slowdown. This is not necessarily a bad thing – China Economic Review has long argued that growth needs to come down for crucial reforms to take place that can unleash a new era of less frenzied but more sustainable economic development. Nevertheless it is still important to watch the pace of deceleration. Many observers are now keenly paying attention to looming risks including the possibility of a property market collapse and a meltdown in the shadow banking sector. Here is a review of what some of the major foreign observers are saying about China’s economy today.
Spanish bank BBVA does “not expect any immediate economic hard landing, financial crisis or a collapse in the national real estate market.” But the bank’s economists reckon the Chinese authorities’ efforts to curtail rapid credit expansion from shadow banking could depress growth. They also see that government efforts to tackle a whole host of problems ranging from overcapacity to pollution would further weigh the economy down.
Still, it is possible to take encouragement from figures that indicate China is moving away from the inefficient investment-driven growth model to one more stimulated by domestic demand. Consumption is now the “main driver of GDP growth, ahead of investment and net exports.” Ultimately, China’s economy should stabilize but that will hinge upon the central government successfully negotiating the fine tightrope act of “sustaining short-term growth and boosting long-term growth potential.”
BBVA forecasts GDP growth of 7.2% in 2014.
London-based Capital Economics has a slightly different approach to gauging China’s future growth trajectory by focusing on labor policy. In recent months, the consultancy argues, Chinese economic officials have stressed that they prioritize employment growth over that of GDP. These new jobs are supposedly needed to take in the growing number of migrants moving into cities. Capital Economics estimates that the number of urban jobs needed to maintain a lower bound of 7.2% growth at 10 million, which is within the “government’s current comfort zone for GDP growth.”
However, if weaker growth prospects hurt job creation, the government might need to take extraordinary measures like the mini-stimulus undertaken in April. But China’s shift to a more services-based economy, which tends to be more labor-intensive, could shield it from the housing market meltdown as “more capital intensive parts of the economy run into headwinds.”In fact, this transition would strengthen the labor market, solidifying the “case for believing that policymakers will not react to a further gradual loss of economic momentum by introducing significant stimulus,” a rather contrarian view. Full employment and a slower rate of economic growth are not mutually exclusive for the country, defying the oft-repeated economic mantra that jobs cannot exist without growth.
Capital Economics forecasts GDP growth of 7.3% in 2014.
Deutsche Bank is emerging as the chief bull among China watchers, with a GDP growth forecast above that of Beijing’s official 7.5% target for this year. The cause for such optimism?A rebound in exports.
Even after Beijing recently announced it would hasten the pace of RMB liberalization, which could strengthen the currency against the dollar and thus make its produces less competitive, Deutsche Bank believes real export growth will prop up China’s economy this year. “More important, though, we expect the external sector to re-emerge for the first time in four years as a source of growth in the economy.” This is because the rate of RMB appreciation is slowing down, headline reforms such as the Shanghai free trade zone and improving external demand from the US and Euro area.
Stronger exports therefore would give policymakers some room to scale back investment-driven fiscal stimulus policies, which have been blamed for the massive build up of non-performing loans and debt levels. The overall effect of export-driven growth should be to quicken the pace of structural reforms.
Deutsche Bank forecasts GDP growth of 7.8% in 2014.
Standard Chartered sees slowing growth in credit and housing sales, the most reliable indicators of economic growth this year. That could be the trigger for a weakening in the overall economy. The bank’s China economists note that growth in total social financing, the widest measure of money supply, decelerated sharply to 16.3% in March from 17.2% in February. Other indicators of growth momentum such as property investment growth were also suffering similar slowdowns.
These worrying signs should prompt Beijing to “gradually loosen policy in Q2 and Q3”, in the form of cuts to the required reserve ratio and increased investment. Even though, it admits, there are fierce critics who argue that cuts to the RRR would represent an about-face from policymakers keen to deleverage and end an era of easy money, it expects “proponents of a cut to win the day in Q2.”
Standard Chartered forecasts GDP growth of 7.4% in 2014.
But what if the above is still too rosy? Research and consultancy GavekalDragonomics leans towards the more bearish assessment on China this year. Analysts there say that 7.4% growth in the first quarter already made meeting Beijing’s 7.5% target for 2014 difficult, while a correction in the property that intensified in April means hitting the growth goal is seemingly “impossible.”
Real estate is at the heart of the assessment as prices look like falling nationwide. They note that the last time the property market had a similar correction in from mid-2011 to mid-2012, 1.7 percentage point of growth was shaved off of GDP. Although the impact this time would be less severe as the economy is already weakening, it could be painful. Overall, “on a quarterly basis GDP is very likely to fall below 7% by end-year, and could even get closer to 6%.”