China’s 7.4 per cent growth in the third quarter of this year is the seventh successive quarter of sustained slowdown for the Asian giant. The financial markets, however, took this somewhat calmly on the assumption that this would be the bottom of the cycle. Indeed their optimism has some basis. Property prices are picking up, retail sales have rebounded, at least in real terms, over the past couple of months and, despite some slowdown in the year-on-year growth numbers, fixed asset investment hasn’t exactly collapsed. Leadership change in China is historically associated with a surge in capital formation, driven partly by fiscal stimulus. And it is unlikely that the change due at the end of this year will be any different.
That said, the likelihood of China returning to the scorching double-digit growth rates – to which the world had become accustomed – seems remote in the foreseeable future. The funny thing is that Chinese authorities aren’t quite panicking. It might be useful to remind ourselves that China’s policy-makers with their tight controls over the banking system and the free use of quantitative credit targets have the wherewithal to very quickly reverse a dip in the growth cycle in the near term. They have, at the first whiff of slower growth in the past, quickly ramped up public infrastructure and housing projects through a sharp rise in directed credit. This time seems to be different.
As a market strategy report by the Development Bank of Singapore (DBS), dated September 13, points out, “The fact that China’s slowdown is partially an intended policy outcome seldom makes the headlines.” In short, China seems to be reworking its growth strategy with the objective to ensure that the excesses and imbalances that had built up in its pursuit of an untrammeled growth momentum do not recur. The Chinese government introduced property price controls over the past couple of years to prevent a speculative bubble from blowing up and these remain firmly in place. As the DBS report points out, “China can easily spur growth by removing the numerous restrictions on the property market. The fact that they have not chosen the easy route shows increasing maturity in macroeconomic management.”
Second, Chinese authorities seem to be at peace with the moderation in fixed investment (currently 20 per cent year-on-year compared to 24 per cent in 2011), since this is seen to be compatible with the broader strategy of rebalancing the economy away from investment towards domestic consumption. Thus, instead of the investment binge that came as part of the 2009 stimulus package that sought to fight the global financial crisis, investment stimulus has been targeted at cities and industries that actually needed infrastructure support or capex. The National Development and Reform Commission, for instance, has approved the subway expansion plans in 18 cities. This is far from the “bold” stimulus measures that China has adopted in the past. However, this avoids the creation of zombie infrastructure projects – the highways to nowhere and ghost cities for which China’s past stimulus efforts have become infamous — and is perhaps the right way to go. Finally, its monetary policy has become restrained and, though some more cuts in the reserve ratio are due this year, the focus is on keeping inflation on a leash.
There is another thing that one needs to bear in mind about China. The 2008-09 investment boom that saw investment continue to rise as share of Gross Domestic Product well into 2010 had a significant component of “dodgy” public investment projects. But as an International Monetary Fund report (“Regional Economic Outlook-Asia Pacific”, April 2012 ) points out, there was a surge in this phase in investments in high-end manufacturing — wind turbines, solar panels, semiconductors, automobiles, etc. Therefore, Chinese exports are beginning to compete in high value-added areas where factors like quality and technological sophistication rather than cut-throat price competition become the dominant factor. We could very well see a new phase in China’s export cycle, as global demand picks up, whose sustenance will depend less on low wages and an artificially cheap currency.
For the asset markets, the possibility of a cyclical rebound in the Chinese economy over the last couple of quarters bodes well and could breathe some life into the commodity markets and into “China-plays” like the Australian dollar. In the longer term, if it does follow a more “structurally” stable growth path and the markets begin to factor this in, it could give the entire Asian growth and earnings trajectory some degree of stability. The periodic jitters about a bursting housing bubble, for instance, could reduce some of the “tail risk” of an implosion.
This is not to gloss over the problems of the Middle Kingdom. The jury is out on how successful or complete rebalancing is. Chinese banks have more than their fair share of bad loans stemming from their exposure to housing and unviable infrastructure projects. The predilections of the new leadership are still unknown. Its demographic dividend is rapidly dissipating. Thus, the risk of the current market bullishness turning into renewed caution if China’s growth falters and policymaking turns dirigiste yet again remains. Given China’s clout in the global scheme, it is a risk for the world economy as well.
The author is with HDFC Bank. These views are personal
