Time to worry about China? Not quite yet — Clyde Russell
MAY 11 — Just how worried should we be by yet another set of disappointing numbers on the Chinese economy?
The key to answering that question is whether you believe the soft April industrial output, retail sales and trade data is part of a downward trend, or whether it marks the low point, or close to it, for activity.
Industrial output rose 9.3 per cent in April, below the 12 per cent forecast and weakest growth in three years, while retail sales also disappointed, expanding 14.1 per cent versus a forecast of 15.2 per cent.
Coupled with weak trade figures yesterday, month-on-month declines in key commodity imports such as crude oil, iron ore and copper, and you build a picture of Chinese economy that’s off the boil.
This is undoubtedly bad news for the world economy, which has been relying on China to make up for weakness in Europe and a still slow recovery in the United States.
It’s also bad for those wanting higher commodity prices, and it’s perhaps no surprise that the S&P GSCI Index of commodities dipped into negative territory for the year as the China data disappointed the market.
But there is also a risk in becoming too bearish on China, just as there are dangers in viewing the world’s second-largest economy through the prism of Western experience.
China is still largely a controlled economy and I suspect that the authorities aren’t overly perturbed by the recent softness in the data.
Certainly, there is no sign of a rush to loosen monetary conditions, rather a process of relaxing bit by bit in order to spur certain sectors and help the plan to re-weight the economy to domestic demand from export-led growth.
In fact, if you were looking at China’s economic performance in recent months, a good word to describe the slowdown would be orderly.
And that is a huge contrast to what has been seen in Europe and the United States.
The Chinese aimed to slow their economy to lower inflation and prevent a housing bubble.
Both aims appear to be on track with consumer inflation dropping 0.1 per cent in April, taking the annual rate down to 3.4 per cent from 3.6 per cent in March.
Real estate investment rose 18.7 per cent in the first four months of 2012 from a year earlier, down from 23.5 per cent for the first three months of the year.
If in achieving their aims, the Chinese also had the happy side effect of trimming growth rates in raw material imports, any subsequent drop in global prices for commodities would be welcome.
So far, it’s hard to argue that the Chinese have been anything other than successful in slowing their economy without having a hard landing.
That they have done so at a time when Western economies would have preferred China to be going all out only shows that Beijing has a domestic focus, and unsurprisingly, doesn’t really worry about what Western analysts think it should be doing.
The question is then whether the latest data show the economy is losing steam too fast, and whether, in effect, the authorities have lost control of their soft-landing scenario.
Recent improvements in both the HSBC and the official Purchasing Managers’ Index suggest that the worst may be past for China’s vast factory sector, but given lags between turns in the PMIs and in industrial output, another month or two of weak results can’t be ruled out.
For commodities, particularly iron ore and copper, there may well be months of subdued imports given large stockpiles that need to run down. However, crude imports should gain traction again now that the refinery maintenance season is over and summer demand is looming.
The Chinese authorities also have much more scope to stimulate their economy than their debt-laden counterparts in the developed world, and it wouldn’t surprise to see some relaxing of bank reserve requirements in the next few weeks.
The time to worry about China will be if there is further deterioration in data in coming months, with no sign of a turnaround by the third quarter. — Reuters
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.
