China GDP Slowdown No Surprise

Chinacreditbinge.pngBy John Richardson

ALL but two analysts out of a Bloomberg survey of 41 over-estimated China’s first-quarter GDP growth.

Monday’s announcement of the 7.7% increase – pushing China in to the longest streak of expansion below 8% for 20 years – understandably, therefore, led to numerous downgrades in full-year 2013 growth forecasts.

For example:

*Louis Kujis, Hong Kong-based chief China economist at the Royal Bank of Scotland, lowered his forecast to 7.8% from 8.4%.

*JP Morgan cut its growth forecast to 7.8% from 8.2%, while the World Bank trimmed its 2013 estimate to 8.3% from 8.4%, which, in our view, is still too optimistic.

Closer to the mark was the chief financial officer of BHP Billiton, Graham Kerr, who told Bloomberg that China’s GDP growth would moderate to 6% per year over the next two years.

We continue to worry that some analysts, along with some chemicals-industry executives, have yet to fully realise that the profound changes in China’s economy mean lower growth over the long term.

Supporting our view was that the disappointing Q1 GDP data led to hopes of a new round of big fiscal stimulus.

“The government is sure to do something significant to support growth in the second half of the year,” a senior executive with a global aromatics producer told the blog.

But, as China’s premier Li Keqiang made clear in a speech on Sunday, any stimulus measures would not be introduced at the risk of causing more long-term damage. “If interim measures have to be carried out, they should not set up barriers for promoting market-oriented reform and development in the future,” he said.

(Note: The excellent Sinoicism newsletter of 16 April pointed out the above speech and provided the analysis.)

In other words, economic rebalancing will continue including the ongoing frugality and anti-corruption campaigns.

So too will efforts to rein-in runaway bank lending.

Total new financing, which includes both official bank loans and lending via the shadow-banking system, increased by 58% in the first quarter of this year over the same period in 2012, raising major concerns over rising property prices, more air being pumped into other asset bubbles and the overall increase in the cost of living.

Plus, there is the potential bad debt problem created by the surge in credit.

Fitch Ratings, in response to the growing risk of a financial sector crisis, cut China’s sovereign credit rate to A+ AA- last week.

“Credit has grown significantly faster than GDP since 2009. China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012,” wrote Fitch when it made it announcement.

“The stock of bank credit to the private sector was worth 135.7% of GDP at end-2012, the third-highest of any Fitch-rated emerging market.”

The ratings agency believes total credit in the economy including various forms of “shadow banking” activity may have reached 198% of GDP at end-2012, up from 125% at end-2008.

“Only 55% of new social financing took the form of bank lending in the 12 months to February 2013, down from 76% in 2009,” said Fitch.

“The proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective.”

Beijing, as a result, seems certain to intensify its efforts to rein-in lending, not only because of the bad debt risk, but also because pumping ever-more money into the economy is resulting in diminishing returns.

“In China, it’s often the case that the numbers themselves are a source of confusion, if not outright disbelief. But sometimes the numbers also speak for themselves. And one in particular is telling: credit intensity,” wrote the Financial Times in this Beyondbrics blog post.

“This measures the amount of credit needed to generate growth, and it has risen rapidly in the past six months to near its highest level. In other words, when it comes to GDP, China is getting less bang from its credit buck.”

(See the above chart from HSBC’s Fred Neumann plotting social financing, or shadow banking, against GDP. The rising line indicates that China hasn’t needed this much credit to generate growth since late 2009.)

The government agrees. Li Ruoyu, a researcher with the State Information Centre said, on the release of the first-quarter GDP number, that using short-term stimulus to boost growth to back above 8% would be like “drinking poison to quench a thirst.” She argued that moves to ease policy were seeing diminishing returns.

“They’re having a smaller and smaller impact on boosting growth — first quarter lending was quite strong but growth still wasn’t that good,” she said.

“This is what people call overheating finance but a cooling economy.”

The message from the government isn’t new. Beijing has been making it consistently clear since 2011 that rebalancing would have to take place.

And from February of this year, it was clear that the process had begun.

Xi Jinping, China’s president, further underlined the policy direction in a meeting with business leaders on 8 April, when he reiterated that “super-high or ultra high-speed growth” was over.

And in March, outgoing premier Wen Jiabao re-stated that the government’s 2013 GDP growth target was 7.5%.

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