Beyond China’s Latest GDP

Jim Trippon  |

The China GDP growth slowed to 8.1 percent for the first quarter, less than the expected 8.3 percent predicted by analysts. The S & P 500 dropped 17 points, 1.25 percent, while the Dow lost nearly 137 points, 1.05 percent, both partially in response to the news of further slowing growth in China. Fourth quarter GDP growth had slowed to 8.9 percent, while Beijing had announced that its target growth rate for 2012 would be 7.5 percent.

China GDP Annual Growth Rate Source:

(Click to enlarge)

Although there was some of the usual commentary that Chinese growth was all but permanently dead, the GDP figure wasn’t really a surprise to many if not most China observers. While the US stock markets took the news as part of their reason to sell off, China’s stock markets took the news differently, by staging a rally. Chinese investors read the news as a signal that there would be more policy easing to support growth.

Some Reaction

There were plenty of voices jumping on the negative aspects of the GDP number. One was Ruchir Sharma, author and head of Morgan Stanley Investment Management emerging markets equities and global macro, who manages $25 billion in assets and said that it’s the end of torrid growth for China and other emerging markets. Sharma wasn’t predicting doom or collapse, however, for China, as his thesis is that the BRICs aren’t going to see the kind of growth they’ve been experiencing as sustainable. China, he maintains, is a maturing economy.

Further Reaction

On the other hand, Zhang Zhiwei, chief economist at Nomura who held a widely known bearish position on China, had predicted a 7.8 percent GDP rate, and a Reuters article suggested Zhang feels an upgrade is in order as the GDP rate beat the lower projections. So, too, does Ren Xianfang, senior analyst at Global Insight in Beijing, who was cited in the same article as mentioning “there’s potential now to upgrade our forecasts.” Global Insight’s call had been for 7.9 percent growth, after all the bad news of the first quarter had been digested. Thus the actual 8.1 reading was a positive surprise.

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A Glimpse At Some Data

A surprising rise in steel production of 10.2 percent for March, with an increase in vehicle manufacturing, in addition to growth in sales of consumer items such as appliances, along with cement and machinery production, all show that the Chinese economy may be finding a floor of support. PMI data hit a high in nearly a year as new orders strengthened. These developments indicate that beyond the low numbers for China’s growth, which were the lowest since the global recession in 2009, there is evidence that the economic slowing itself may be slowing down.

Easing’s Effects

What Premier Wen Jiabao has insisted is “fine tuning” or tweaking of China’s economic policies has been the watchword for keeping growth from slowing too much. While the initiatives in the property sector to cool off rampant speculation and inflated property prices have taken some effect, so too have measures to increase lending. The two cuts in the big banks’ reserve ratio requirements, or RRR, along with the attendant encouragement of the banks to lend, has seen roughly $127 billion additional cash freed up for loans. $160 billion in new loans in March indicate a significant jump in lending already. Analysts suggest that as much as $200 billion more in loans may be forthcoming.

Steel Market Worker In Shenyang, Liaoning Source:

More Easing?

There’s debate among China experts as to whether there will be more easing or whether the economic growth rate would have to fall below the magic 8 percent annualized figure. Regardless of which view is taken, there is still work to be done. The export market has softened due to the grinding sovereign debt drama in Europe, so the pressure shifts to the recovering US economy to provide a boost for this. Long term, Beijing wants a shift away from such a concentration on exports, to a more consumer based economy to balance things out. Meanwhile, the private businesses, the small and medium enterprises, or SMEs, need to have much better access to credit, more like the larger state-owned enterprises do. Again, that’s not going to dramatically change in a month or six months, but it’s reform the central government policy makers desire. Meanwhile, the near-term bottom in China’s economic growth may have been reached, or it may be reached in the next quarter or two. The intimations beyond that are again for growth.

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