Oh dear, oh dear. Last month your correspondent confidently pronounced that Chinese officials had every reason to remain cheerful amid the current economic storm. Cue ubiquitous headlines screaming that China is not insulated from the global turbulence, that the economy’s going down the drain, that growth will slip below 6% next year, that China – shock, horror! – cannot save the world.
Then Beijing confirmed that it was far from cheerful about the domestic situation by launching a massive fiscal stimulus package supposedly worth nearly US$600 billion.
Well, China cannot save the world. And things are certainly looking a lot worse than before. Bar inflation, almost every economic indicator has deteriorated. Industry is slowing; inventories are rising; profit growth is falling; investment is weakening; construction has collapsed; steel and electricity demand is negative; and property sales have dried up.
In terms of headline growth, the key figure to look at is net exports. In US dollar terms, the trade surplus rose marginally in the first 10 months of the year, with export growth currently around the 20% mark. However, currency appreciation means that dollar figures exaggerate the strength of Chinese exports. In renminbi terms, the trade surplus has contracted by 7% so far this year.
Last year, the trade surplus accounted for 2.3 percentage points of growth; the signs are that it will lop 0.5 percentage points off next year’s economic growth.
But exports are merely the icing on China’s economic cake. True, the icing has been layered on thickly for the past five years, but the cake itself – domestic demand – is what counts. And it is the sudden slowdown in investment that is rattling the policymakers in Beijing. Domestic demand is expected to account for 100% of economic growth next year, so the government cannot afford to let things slip further.
The problem is less the impact of the global credit crunch than a homegrown slowdown caused by tighter monetary policies – a deliberate attempt to cool what looked like an overheated economy and to dampen inflation. This was exacerbated by a crackdown late last year on the property market. Tighter controls on lending to property developers and a series of policies designed to squeeze speculation out of the high-end market succeeded in taking the steam out of the housing market.
The consequences are now rippling through the rest of the economy. Demand for basic materials – steel, cement and other construction materials – collapsed in third quarter. This is now being reflected in falling electricity demand as the power shortage of the past five years turns to a glut.
Anecdotal evidence also suggests that consumer confidence is crumbling, belying officially rosy retail sales numbers. Big retailers such as Carrefour are reporting weaker numbers nationwide, and restaurants are noticeably less crowded than they were a year ago.
So, are things as bad as they seem? China watchers are so used to seeing steady 20% growth in almost any sector that the recent fall in demand has come as a shock.
Nevertheless, Beijing remains in a strong position to save itself, if not the world. With the effect of the fiscal stimulus kicking in early next year – even if new spending will probably amount to just one-quarter of the headline number – GDP growth should not drop below 8%.
It is too early to join the doomsayers just yet.