China slowdown

By George Magnus

Serial disappointments in emerging country growth rates since 2011 has forced the International Monetary Fund (IMF) to cut its five-year-ahead forecasts for a group of 153 emerging and low-income developing countries on six occasions since late 2011 (see chart).

However, in its latest World Economic Outlook, the IMF again assumes that current disappointments will give way to restored equilibrium growth rates over the next five years. But what if there is no equilibrium and emerging market (EM) growth continues to disappoint? 

By Alastair Campbell and W. John Hoffmann, Exceptional Resources Group

The “rule of law” is set to dominate China’s key Communist Party plenum in October, Xinhua, the official news agency, has said. The rule of law is a “must” if the country is to attain “economic growth, clean government, cultural prosperity, social justice and a sound environment”, Xinhua added.

Many observers would agree. Some may even believe that China is about to embrace a Western-style system in which all actors – the government, institutions, companies and individuals – become subservient to an independent legal code. But what, in practice, is the renewed focus on rule of law likely to mean for China’s development? 

There is more gloomy news for the world’s second largest economy. A comprehensive official survey of Chinese households, businesses and banks finds demand for loans slackening further in the third quarter, suggesting scant prospects of a reprieve from the credit slump seen in August and July.

Some 3,100 banks interviewed by the People’s Bank of China (PBoC), the central bank, reported a significant easing in loan demand among all three categories of firms – small, medium and large – for the third quarter, which ends at the end of September.

The loan demand index fell to 66.6 per cent, down from 71.5 per cent (see chart). The muted demand for loans is set to create headwinds for the PBoC’s initiative this week to boost economic growth by injecting Rmb500bn ($81bn) into the five largest state-owned banks, economists said. 

By Guonan Ma, Bruegel

Against a backdrop of weakening domestic demand, and in the slipstream of a major debate about whether Chinese monetary policy in the last year has been too restrictive, there have been definite signs of Chinese monetary loosening in recent weeks. This makes sense. Timely and measured monetary easing will support growth, facilitate structural rebalancing and underpin rapid economic reform.

There is little doubt that Chinese growth has been losing momentum. During the past few quarters there were clear signs of rising inventories, slumping property sales, producer price deflation, declining consumer price inflation, weakening corporate earnings, slowing investment and anaemic industrial production. Fortunately, private consumption is still holding up. 

By Qu Hongbin, Co-Head of Asian Economic Research, HSBC

For many, China’s growth model, which has delivered average annual GDP growth of 10 per cent over the past three decades, simply looks wrong: a national savings rate of around 50 per cent is unheard of in a large, modern economy.

A typical diagnosis states that China invests too much and consumes too little. The prescription is “rebalancing” – moving the economy away from investment towards consumption-led growth. However, a consumption-led growth model has little in theory or evidence to support it. 

By Andrew Brown of Emerging Capital Partners

Last week the International Monetary Fund (IMF) predicted a further drop in China’s growth to 7.3 per cent in 2014, the lowest figure that the country has experienced in the last 23 years.

China’s continued economic slowdown as it shifts from export-led to consumer-driven growth has prompted speculation as to the knock-on effect on economies that have benefited from China’s rise. Debate has centred on whether many frontier economies, including those of sub-Saharan Africa, are reliant on continued rapid growth in China’s demand for commodities to drive their own economic development. 

China may have announced a mini-stimulus to boost growth but it’s unlikely to prevent the world’s second-largest economy from slipping into a technical recession this year. At least that’s the view of economist Diana Choyleva at Lombard Street Research.

Of course, the basic idea that China could indeed contract for two straight quarters relies on one simple assumption: the official numbers aren’t just wrong, they are way, way out of whack with reality. 

Inflation below target; slumping exports; growth forecasts down – it’s not been a good week for China data.

The market response? Time to buy! The Shanghai composite index has just closed up 3.2 per cent, having been up 2.2 per cent on Thursday. It’s the best two-day gain since early 2012, according to Bloomberg. 

If a company suspends shares once amid fraud accusation, it could be merely unlucky. When it does it again six months later, it starts to look like a trend.

That is the unfortunate situation that Zoomlion, China’s second largest maker of heavy machinery, finds itself in now. Back in January, newspaper offices around the world received an anonymous letter accusing Zoomlion of falsely inflating sales, backed up by 76 pages of purported sales records. Zoomlion rejected the accusations as “false” and “groundless”. Its share price fell more than six per cent when trading resumed. The events of this week are eerily similar. 

By Mitul Kotecha of Crédit Agricole.

It was not so long ago when expectations for the Chinese currency, the renminbi, had shifted to a prolonged period of weakness against the US dollar. This corresponded with the view that the Chinese authorities would use their currency as a tool to help cushion the impact of an exports slowdown.

All of this changed in late July from when the RMB began a multi-month period of appreciation at a pace that has astounded many analysts. 

Assigning letters to economic trajectories was very much in vogue back in 2009. Would recoveries be ‘V’, ‘W’ or ‘L’ shaped? Now the craze seems to be coming to China.

October’s official PMI data showed that China’s factories are back to growth – just. But analysts disagree about whether this points to a big turnaround. 

By Linda Yueh

This week’s flash PMI data suggest the recent weakness in the Chinese economy extends into the fourth quarter. HSBC PMI rose in October at the start of the quarter, but remains below 50 at 49.1. That’s an improvement from September’s 47.9 but is still a sign of contraction.

This is after GDP expanded 7.4 per cent in the third quarter, slower than the government’s 7.5 per cent target. And, consensus forecasts gathered by Bloomberg don’t show much stimulus or easing for the rest of the year. 

Have the dark clouds looming over the renminbi finally cleared? On Thursday the Chinese currency hit its highest level against the US dollar since May, breaking through the Rmb6.3 level in the onshore market. Offshore, the currency also rose to a near five-month high.

So, after a brief hiatus, is the renminbi’s appreciation train back on track? 

The latest manufacturing data from China showed a contraction suggesting that any rebound expected from piecemeal economic loosening has not arrived. Lex’s Stuart Kirk and Julia Grindell discuss the case for China bulls.

A lot of ink has been spilled of late discussing the global impact of China’s slowing economic growth. But there has been little discussion however about how African economies will be affected.

Now, ratings agency Standard and Poor’s has stepped into the gap with a report published this week. It says, in short,  that the China slow down may be bad for metal exporters, but opportunities should present themselves for African manufacturers.