Tricky parenting for China's growing pains
Chinese GDP figures show Beijing's property crackdown may have been overdone, but stimulus now in the system means the downturn could be close to bottoming out.
After disconcerting inflation and trade data earlier this week the market braced itself for a confirmation that second-quarter growth statistics released today would show a further deceleration, with GDP growth below the 8 per cent level generally regarded as the Chinese authorities’ "line in the sand."
As it happened, GDP came in at a meagre, by China’s standards, 7.6 per cent, confirming the markets’ fears. That’s a year and a half of steadily decelerating growth.
It is evident that China’s authorities have themselves become increasingly concerned about the economic slowdown, cutting lending rates twice within the past month or so, widening the window for banks to discount that rate, lowering the reserve ratios for banks, encouraging more infrastructure spending and modestly encouraging more private investment.
According to Liu, the absence of a discernible response to the measures the Chinese have been increasingly taken is one of timing and execution rather than ineffectiveness.
There are some obvious reasons for China’s faltering growth rate, most notably the problems within its biggest export market, Europe and the meagre growth within its second-largest market, the US.
More significant, however, was the authorities’ assault on the property bubble that developed last year amid their fears that inflation would get out of control. That crackdown has been very effective, with the most recent inflation numbers showing inflation at a two-year low. Perhaps they overdid things.
Liu effectively argues that the authorities have been too cautious in responding to the slowdown because of the inflationary fears and that, because it does take time to have an effect, the impact of the easing of monetary policy has yet to show up – although this week’s data on new bank lending suggests the easing of reserve requirements, the reduction in rates and the encouragement to banks to lend is starting to work.
He also points to some execution issues, highlighting the central government’s massive public housing program. It budgeted to build seven million housing units this year but has distributed only 17 per cent of the funds it allocated to the program. That tardiness compounds because local authorities then don’t spend their matching allocations.
Again, that means delayed effects rather than an absence of effects.
If the authorities were too cautious initially and ended up "behind the curve" in responding to the downturn, the stimulus is now in the system and ought to be reflected in stronger growth numbers as the year progresses. It is conceivable, and indeed a lot of China watchers are now starting to believe, that the downturn in the growth rates is close to bottoming out.
That doesn’t mean a rapid reversion to the double-digit GDP growth of recent years. There are structural changes occurring within China’s economy and evolving demographics that will work against a return to those sorts of growth numbers.
Growth of around 8 per cent or, as Liu suggests, even 6 or 7 per cent, in an economy that has grown dramatically over the past half-decade, still makes China a major driver of global economic activity.
The other interesting aspect of Liu’s analysis was his interpretation of the recent slowdown in China’s imports, which may have relevance to its future export activity.
While it is probably a lead indicator of some changes to China’s trade patterns in response to the problems in Europe and the US, the point he made is that while the value of imports might have declined in volume terms they have held up – it is the big fall in commodity prices that has impacted their value.
That suggests that a pick-up in China’s growth rate later in the year and the impact that would have on demand for raw materials could show up in a strengthening of commodity prices, perhaps not to the levels of a year ago but to stronger levels than they are at today.