Just as China’s economic downturn has been largely self-inflicted, so the country’s apparent economic resurgence is also the progeny of domestic policy.
Tighter monetary policies imposed from 2007 through most of 2008 have been replaced by a credit boom. A total of US$278 billion in new loans were issued in March, making US$673 billion for the first quarter. This, plus the rollout of new infrastructure projects, was responsible for a 28.6% year-on-year jump in fixed-asset investment in the first quarter, 4.2 percentage points up on the growth rate seen in the first quarter of 2008.
Jonathan Anderson, global emerging markets economist (and before that, chief China economist) at UBS, was the speaker yesterday at CER’s monthly breakfast briefing. As you might expect, his outlook was as positive as that of his UBS colleague Wang Tao, who boosted her 2009 GDP growth forecast from 6% to 7-7.5% on the back of the first quarter figures.
Notably, Anderson is optimistic about real estate and construction – which is important because the restrictions imposed on this market over the last two years, and the subsequent weakness in the heavy industry supply chain that feeds it, were largely responsible for the wider domestic slowdown.
“There was certainly plenty of over-leveraging and oversupply in parts of the market… but in the first quarter we saw a huge pickup in underlying activity,” Anderson said. “Prices have stopped falling, rents have stopped falling. We are seeing 30-40% growth year-on-year but the pickup is from a low base. Construction has come back on and we are almost back to the zero line in terms of 2009 year-on-year growth. Steel demand is coming back and electricity consumption is moving back into the positive. We look to the property market to get China back on its feet.”
Despite the rebound in transaction volumes, some economists – at least for now – are hesitant about calling a fully-fledged rebound in the property market, one in which this sales growth translates into new investment and construction.
“Housing transaction volumes have staged a recent recovery, but inventories in major markets remain elevated, suggesting that the pace of property investment may remain at subdued levels for some time,” Jing Ulrich, chairman of China Equities at J.P. Morgan, wrote in her assessment of the first quarter economic data.
UBS’s Wang added that, although she had long been tipping mass market property construction to offset a decline at the higher end of the market, “the latest pickup in sales and prices in the existing (largely high-end) property market may delay new investment in low-end and mass market segments.”
This begs the question: What if the current credit-fueled stimulus fails to work as quickly as the government hopes? Should we expect a second wave of stimulus measures?
Anderson is not a fan. “Stimulus one was huge on a headline basis but if you look at the year-on-year new spending it’s probably about the right size. It is going towards bridges, waterways, subways, science parks… things that are needed. The second stimulus would target more white elephant industrial stuff.”
He warns that failure to rein in the current lending boom would give local authorities license to finance their pet projects – a new steel mill here, an auto company bailout there – and suddenly Beijing faces the kinds of overcapacity problems that have dogged nearly every phase of industrial expansion in China. In the same way, an excess of money flying around in the economy is a recipe for asset bubbles.
It is a fine line to tread. While Anderson warns of being too bold, Andy Rothman, China macro strategist at CLSA, warns of not being bold enough. “In the near term, our biggest concern is that the government becomes complacent and prematurely pulls the plug on the stimulus programs that have re-energized the economy. While the growth rate of lending and M2 has to be throttled back this quarter, it would be a mistake to choke it off,” Rothman wrote in a recent report.
Anderson’s final reassurance is that China is getting better at treading the line. The industrial boom of the 1990s was far more volatile than that seen in the early to mid 2000s. He points to utilization rates of 50% in the 1990s versus about 70% for steel industry today, and annual credit expansion of 40%-plus for a couple of years in the 1990s versus about 25% for 2003-2005.
“Now they have more control over the banking sector so things are getting better,” Anderson said. “Next time around the cycle will not be so pronounced.”
A government-engineered credit explosion requires an equally sturdy government-engineered retrenchment on the other side.