China sows for a solid growth harvest

Chinese growth will be strong this year and could surprise on the upside. Meanwhile, jostling over financial sector and other policy reform will heat up ahead of a key CCP meeting later in 2013.

The new calendar year has begun as the old finished: with a slew of positive economic data, providing further evidence of the continuing strength of the Chinese economy. This will no doubt bring cheer to Wayne Swan and his senior Treasury officers as they swelter in Canberra’s summer trying to find further budget cuts.

Over the past six weeks, official Chinese data show growth in industrial production has been sustained, with the monthly Purchasing Managers Index in December remaining unchanged from November’s seven-month high of 50.6. Central bank figures showed China’s M2 measure of money supply grew 13.8 per cent in December from a year earlier, broadly in line with market expectations of a 14 per cent rise.

Most recently, consumer prices add to the picture of continuing strength in the economy. The National Bureau of Statistics recorded 2.5 per cent year-on-year Consumer Price Index growth for December, the highest monthly figure since May and also up on corresponding figures of 2 per cent in November and 1.7 per cent in October.

Somewhat unexpectedly, given protracted US weakness and shrinking real economies in Britain, the EU and Japan, China’s exports strengthened markedly in December and imports were also up. Exports increased 14.1 per cent and imports 6 per cent in December, as compared to the same time last year. China’s trade surplus rose by more than 50 per cent and foreign exchange reserves grow to over $US3.3 trillion, reversing three straight years of annual declines.

For 2012, China’s economy is likely to record growth of around 7.5 per cent. World Bank, IMF and major commercial bank economists are all huddled around this mean. Still, precision to the first – let alone second – decimal place in Chinese economic data involves a degree of trust that requires a leap of faith. What is clear, though, is that the second largest economy in the world continues to sustain a rate of growth that will allow it to roughly double in size in a decade.

It is little wonder then that prices for raw material, and especially iron ore, remain robust. When negative sentiment about China gripped the world market in the third quarter of last year, many predicted that demand and prices would not recover, especially as supply is set to expand over the next few years. The weakness was mainly attributable to short-term influences affecting confidence, notably news from Europe and political factors in the lead up to the 18th Party Congress.

Credit conditions were eased somewhat through the course of the year, but loss-making steel mills (operating under restrictions on output prices but unrestrained input prices) decided to cut physical stockpiles of iron ore and coal to free up cash. Something of a stampede to the exits occurred, driving down iron ore and coking coal prices. Iron ore prices, in particular, have now recovered strongly.

The year ahead

The new political leadership team seems to have settled in quickly to their new roles. This should not be a surprise, as Party General Sectary Xi Jinping and Vice Premier Li Keqiang in particular have effectively been in training for the past five years. Other key figures, such as leading financial reformer Wang Qishan, have also been closely involved with the economic policies of the outgoing leadership. Continuity will characterise economic policy in coming months.

The Third Plenum of the 18th Party Congress will be held around September or October this year. This is customarily the key meeting of each Party Central Committee (which is elected every five years) for major economic policy statements. Much internal jostling over policy will precede the meeting. Think tanks and other economic policy bodies, as well as high-profile individual economists, will be seizing every opportunity to speak out in public to try and influence the plenum. We will continue to monitor these debates over the next nine months: financial sector reform is likely to feature in any new policy settings.

As for the growth outlook, analysts have been surprised by the strength shown in the numbers for the last quarter. Even without any change in world economic conditions, growth this year could comfortably be around 7-8 per cent, with something a little over 8 per cent also quite likely. Again, the precise numbers matter less than the overall trend, which indicates continued strong growth.

And yes, China’s economy still faces myriad challenges – the dominant role of monopolistic state-owned enterprises; unbalanced investment-driven growth settings; an inefficient banking sector that – among other things – stymies small and medium sized enterprises; and a largely closed capital account that contributes much to inefficient savings and investment outcomes.

As important as these problems are, especially for long-term growth, they will not see China prematurely enter a low-level equilibrium trap as Japan did in the late 1980s (though at a much higher income level). China is largely poor, with some 300 million people who will move out of agriculture into urban employment over the next 15 years, and thus it still has years of economic catch-up ahead of it.

And a new study just released, which recalculates foreign direct investment in China to include retained earnings, found that rather than FDI in China falling – as widely believed in recent years – it has actually been rising quite strongly. This would seem to be a big vote of confidence by foreign business in the outlook for the Chinese economy in 2013.

Geoff Raby is Chairman and CEO of Beijing-based advisory firm Geoff Raby & Associates, and a former Australian Ambassador to China.


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