Another week, another sign of strain within China’s economy as the central government steps up its public statements in support of a possible stimulus.
Europe’s woes continue to weigh on China’s factory sector, with HSBC’s Flash Purchasing Managers Index (PMI) sliding to 48.7 in May as the index posted its seventh straight month in contractionary territory. HSBC’s PMI reading draws from a survey of small and medium-sized businesses and better reflects the health of China’s private sector, in contrast to an official reading of China’s state-owned manufacturers that the National Bureau of Statistics will publish this coming week. HSBC’s manufacturing figures are also typically more pessimistic than the official numbers, given that smaller companies tend to suffer more in an economic downturn than state-owned companies which have easier access to credit and are less exposed to foreign markets.
Indeed, the two readings have diverged of late – official PMI has increased for five straight months and signaled a rebound for China’s factory sector in March and April. But with the government looking to reduce the influence of its state-owned enterprises and focus on the quality of economic growth as it maps out the next phase of China’s development, the health of private businesses will likely become an increasingly important barometer. And while official PMI has been a source of relative optimism, China’s industrial giants have faced their share of hardship as well. Profits for the country’s state-owned enterprises have fallen nearly 10 percent from a year earlier, according to The China Daily.
The good news, writes HSBC’s own analyst Qu Hongbin, is that continued weakness suggests that Beijing will pursue more concrete policy action to ensure a soft landing for its economy. On the surface, recent public statements indicate that the government is prepared to do so. Premier Wen Jiabao took time from his trip to Wuhan last weekend to vow proactive policies in support of growth, and the State Council’s weekly meeting on Wednesday yielded a pledge to make stable growth a priority. While a stimulus package similar to the one doled out in 2008 may be “inadvisable” and unlikely, the State Council’s statement hinted that it would focus on tax reform, large infrastructure projects and attracting private investment in sectors such as energy, railway and telecommunication.
The stimulus packages are expected to reach 1 trillion yuan, according to state media, which hailed the proposed measures even though specific details have yet to emerge:
The increased likelihood of an economic downturn, together with a worse-than-expected external economic environment, has contributed to the “sudden reversal” in China’s tightening macroeconomic policies. It is the Chinese government’s belief that steady economic growth will help defuse the country’s looming economic and social problems. Thus increased inputs into infrastructure construction, moves to expand domestic demand and tax reductions on enterprises are viewed as effective ways to achieve this goal.
The bears are circling, and critics point out that the inefficiencies and inequalities of China’s economic model have set it up for a big fall, but The Economist reports that “the very unfairness of China’s system gives it an unusual resilience.” And despite all of its problems, writes GK Dragonomics’ Arthur Kroeber in Foreign Policy, China’s economy is not in serious trouble:
Not just yet. The odds are that China will navigate these shoals and continue to grow at a fairly rapid pace of around 7 percent a year for the remainder of the decade, overtaking the United States to become the world’s biggest economy around 2020. That’s a lot slower than the historical average of 10 percent, but still solid. Considerably less certain, however, is whether China’s secretive and corrupt Communist Party can make this growth equitable, inclusive, and fair. Rather than economic collapse, it’s far more likely that a decade from now China will have a strong economy but a deeply flawed and unstable society.
China’s economic model, for all its odd communist trappings, closely resembles the successful strategy for “catch-up growth” pioneered by Japan, South Korea, and Taiwan after World War II. The theory behind catch-up growth is that poor countries can achieve substantial convergence with rich-country income levels by simply copying and diffusing imported technology. In the 1950s and 1960s, for instance, Japan reverse-engineered products such as cars, watches, and cameras, enabling the emergence of global firms like Toyota, Nikon, and Sony. Achieving catch-up growth requires an export-focused industrial policy, intensive investment in enabling infrastructure and basic industry, and tight control over the financial system so that it supports infrastructure, basic industries, and exporters, instead of trying to maximize its own profits.
China’s catch-up phase is far from over. It has mastered the production of basic industrial materials and consumer products, but its move into sophisticated machinery and high-tech products has only just begun. In 2010, China’s per capita income was only 20 percent of the U.S. level. By most measures, China’s economy today is comparable to Japan’s in the late 1960s and South Korea’s and Taiwan’s around 1980. Each of those countries subsequently experienced another decade or two of rapid growth. Given the similarity of their economic systems, there is no obvious reason China should differ.
In other words, according to The Financial Times’ David Pilling, “the wobbly panda won’t fall yet.”
Loans Likely to Miss Targets in 2012
With Chinese New Year data now displaced by the more indicative and disappointing lending figures from April and May, several bank officials acknowledged this week that China’s biggest banks will likely miss their annual new loan targets for the first time in at least seven years. From Bloomberg:
A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than an estimated government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small and mid-sized companies for loan growth after demand from the biggest state- owned borrowers dropped, the people said.
The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes.
Private Capital: Is the Door Open?
Among the growth-oriented measures discussed by Beijing this week, none have emerged more quickly or tangibly than those supporting the flow of private capital into the economy. The China Banking Regulatory Commission announced on Saturday that it would treat private capital entering the banking industry with the same standards as state capital, one day after the State-owned Assets Supervision and Administration Commission (Sasac) put out a guideline that encourages the injection of private funds in SOEs. The National Development and Reform Commission (NDRC) is also in the process of drafting rules for private investment in monopolized industries such as electricity, oil and natural gas, according to Xinhua News.
The flurry of policy announcements suggest China’s “most determined push” to boost private investment since it joined the World Trade Organization, according to Reuters, but will real structural reform emerge? China is open for business for several reasons, writes Forbes’ Gordon Chang, but new policies look like “another instance of Chinese vaporware“:
Why? In the last few years state enterprises have become entrenched and extremely powerful in Chinese political circles. And provincial and local governments are even more hostile to non-state capital because of the perceived divergence of interests between private investors and Party officials.
Moreover, it’s unlikely that much, if anything, will get done this year as top leaders are now embroiled in disruptive political struggles. In fact, part of the reason for the accelerating economic slide is that for months they have been distracted by the worsening turmoil in the top reaches of the Party. Moreover, not much may get done next year either. Xi Jinping is slated to take over this fall, and new supremos usually take a couple years before they are able to effectively exercise power.
In any event, central government ministries, if they were truly serious about liberalization, would just implement structural changes as opposed to talking about them. Until there is a sign he is serious this time, many will think Premier Wen Jiabao is borrowing from his 2010 playbook when he had his State Council grandly announced similar reforms that were not put into effect with real rules.
And there is one more factor suggesting private capital will not rescue the Chinese economy this time. As domestic and foreign investors learn more about both the fundamental and cyclical problems in China, it will be increasingly unlikely that anyone will commit substantial sums to the country.
- China can now bypass primary dealers on Wall Street and buy U.S. government debt directly from the U.S. Treasury, according to documents viewed by Reuters.
- The Economist checks up on Wenzhou’s informal lending system.
- Fitch affirmed the ratings of China’s five state-owned commercial banks this week, according to Caijing.
- FT’s Alphaville blog details the rising tussle over dollars in China, specifically the duration mismatch between longer-duration dollar assets and short-term dollar liabilities.
- In an effort to facilitate the growth and expansion of local investment banks, China’s Securities Regulatory Commission (CSRC) is rolling out sweeping brokerage reforms.
- Bloomberg reportst that China’s top fund manager is bullish on yuan-denominated stocks going into the second half of the year.
- Reuters details the efforts taken by local authorities in Weifang to save a local rayon factory and avoid what would have been CHina’s first ever bond default.
- The China Daily reports that the economic slowdown has disrupted foreign and domestic demand for iron ore and coal. The aluminium industry is hurting as well, according to Reuters.
- China Auto Rental became the latest Chinese company to put off plans for a U.S. listing, canceling its US$138 million IPO.
- Li Ka-shing, Asia’s richest man, announced his succession plans on Friday.