No rabbits hidden in China’s hat this time
LONDON, Aug 6 — Investors will be looking to a data deluge from China this week to give the global economy a further lift after Friday's strong US jobs report. They risk being disappointed.
Figures for July, starting on Thursday and covering everything from trade to bank loans and investment, are likely to show the world's second-largest economy is, at best, stabilising rather than recovering briskly.
And while Beijing has both the will and the means to provide extra fiscal and monetary stimulus if growth flags, China-watchers rule out a repeat of the massive expansion of credit that successfully rebooted the economy after the global financial crash of late 2008.
That means China, and Asian economies increasingly tied to it, can do little to overcome the headwinds blowing in from the United States and, especially, Europe.
“The problems in Asia that are causing the slowdown come predominantly from outside the region,” said Rob Subbaraman, chief economist for Asia at Nomura in Hong Kong. “Europe is a bigger than the US as an export market for most Asian countries now, and it's a big investor in the region.”
In today's interlocking global economy, Asia's travails are rebounding on the rest of the world. Siemens, Europe's biggest engineering conglomerate; BASF, the world's top chemicals maker; US blue chip United Technologies ; and Japan's Hitachi have all recently reported the impact of lower Chinese demand.
Asia as a whole wants to wean itself off exports and generate more domestic growth. China's current account surplus is just a third of what it was in 2007. The process, though, is generally slow.
“Over the next decade we will see domestic demand becoming a bigger engine of growth for China, and that will change the picture quite a lot for Asia,” said Rajiv Biswas, chief Asia-Pacific economist for IHS Global Insight in Singapore.
“But we're not yet in a situation where the growth engine in Asia is strong enough to cruise through a recession in Europe and stagnant growth in the US,” he added.
China's economy expanded 7.6 per cent from a year earlier in the second quarter, the slowest pace in three years. Economists expect growth to pick up moderately in coming months since Beijing has cut interest rates and is speeding up the approval of investment projects.
But this year has been remarkable so far for what has not happened in China: the ruling Communist Party has not gone flat out for growth despite the imperative to preserve economic and financial stability ahead of a once-in-a-decade leadership transition. That is because the 2008 pump-priming has swapped one sort of dangerous imbalance for another: China's external surplus has shrunk, but the economy has become more dependent than ever on investment, which accounts for close to 50 percent of GDP. Personal consumption, by contrast, is no more than 35 percent of GDP, half that of the United States.
Beijing wants better-balanced growth and so, to the surprise of some, it has kept in place curbs to tamp down house prices. It has also kept local government investment on a fairly tight leash.
Seen in this light, the danger from this week's figures is not so much that growth undershoots but that, if it does, Beijing presses the panic button and puts investment spending back on the fast track.
“The risk is that you get more stimulus but it leads to a more unbalanced economy,” Nomura's Subbaraman said.
As such, he said he would be paying particular attention to the relative strength of July's data on retail sales and fixed-asset investment.
Economists have been paring their full-year growth forecasts for China to 8 per cent or less. Markets would react badly to a further slowdown, but Ting Lu, Bank of America Merrill Lynch's China economist, said even a 7 per cent pace would not be bad given the weakness in the global economy.
“We expect China to achieve a growth soft-landing if the euro zone does not break up,” Lu, who has an 8 per cent forecast, said. “We see many risks, but the Chinese economy is still far from collapse.”
Shifting down a gear
Economists at Barclays Capital agreed that the overwhelming likelihood was recovery rather than relapse in China over the rest of the year as the government steps up efforts to support growth.
But they said financial markets needed to adjust their expectations to a China that grows at 8 per cent a year and not the 10 per cent average annual rate of the past three decades.
“Unlike post the 2008-09 crisis, China will not save the world. Political and economic constraints in China (as well as in the other economies) suggest there will be no silver bullet or panacea to quickly pull the global economy out of the doldrums, and 2012 will be a difficult year,” they said in a report.
No outside central bank watches China more closely than the Reserve Bank of Australia, given the Australian economy's dependence on commodity exports to the Middle Kingdom.
In a quiet week for major central banks, the RBA is expected to leave interest rates unchanged at a policy meeting tomorrow.
Citi expects some small upgrades to the RBA's economic forecasts when it released its quarterly monetary policy statement on Friday.
In Britain, by contrast, the Bank of England may well revise down its forecasts for growth and inflation in 2012 and 2013 when it publishes its latest inflation report on Wednesday, according to economists at Investec. — Reuters