Chinese Slowdown

30/03/2012 at 4:16 pm 1 comment

Among the burdens weighing on markets this month has been renewed concern over the prospect of a slowdown in China. In particular, the country’s growth target was revised down to 7.5%, data on exports and foreign investment were weaker than expected, and activity surveys have been a mixed bag. And there are many who await a catastrophic collapse of the property market following years of eye-watering growth.

Some of these concerns are more valid than others. Take the official growth target, for instance. This has been running at 8% for the past 8 years, during which time the pace of expansion actually averaged over 10%.

The property market is scarier. There have been signs of a slowdown in the official data for some time, which anecdote suggests could be far worse. (The reliability of Chinese statistics is a constant cause for concern.) But even here, the slowdown comes as a result of government action – action which at the level of monetary policy took the form of aggressive increases to the reserves required to be held against lending by the country’s banks. The credit crunch was so devastating in its effects partly because it took western policymakers by surprise. The same cannot be said of China.

Furthermore, an important side effect of hiking the required level of capital reserves in the banking system (currently 20.5%) is that it ought to prove more resilient in the face of write downs, limiting the impact of any property bubble on the wider economy. And taking a step further back, even if any banks do need bailing out this won’t be a problem for a nation with no government debt to speak of and over $3,200bn in reserves.

It is the foreign investment and export data, however, that reminds us just how remarkable the Chinese experience has been in recent years. While FDI last month was 0.9% lower than a year earlier, it contracted at rates of over 36% at the nadir of the credit crunch. At the same time, exports – rising at a “disappointing” 18% at present – fell by over a quarter. And amidst the wholesale collapse of its foreign markets, real growth in China’s GDP bottomed at +6.2%.

This was nothing short of incredible. It proved that China’s expansion had organic momentum, something which had disastrously eluded the “Asian Tigers” a decade earlier for example. And while China is the world’s second largest economy in terms of dollar output, if we divide that output by the country’s huge population we find that it remains quite poor in per capita terms – about 90th in the world rather than second, alongside the poorer parts of eastern Europe or the Caribbean. Growth in domestic demand should have a lot further to run.

This “year of the dragon” has got off to a rocky start. The bear case on China – and Chinese real estate in particular – has some merit. But the risks are known and are playing out against a constructive background. If the country could weather the international events of 2007-9 in the way that it did, markets may well be underestimating its resilience to a home-grown shock.


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  • 1. Sell In May? « The Blog @ Vigilant Financial  |  27/04/2012 at 4:22 pm

    […] We last looked at worries over China a month ago, observing that the indicators scaring the market are in a much better state than they were during the 2008-9 recession. […]

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