Cross currents to slow, not halt Chinese growth
London, August 5, 2013
China's monthly data deluge is likely to confirm that the world's second-largest economy is still moving down through the gears but is not about to come to a screeching halt.
Beijing is walking a fine line.
The leadership has underlined its determination to hit this year's 7.5 per cent growth goal by fine-tuning polices to help industries work more efficiently. But it is willing to accept some slowdown to wean the economy off credit-driven investment.
These cross currents were reflected in a mixed pair of manufacturing reports last week. The purchasing managers' survey conducted by information provider Markit fell, while the one issued by the government - preferred by many economists - rose.
"At the moment it does feel, if anything, as though things are getting weaker rather than stabilising," said Stephen Green, an economist with Standard Chartered Bank in Hong Kong. "But the PMI was telling us that China is not collapsing."
Slower wage growth signals a less-vibrant job market, while vested state interests are stifling small and medium-sized firms, Green said.
But project approvals have been rising since the spring and the housing market is steadying. What's more, China's statistics do a poor job of capturing the services sector and the growth of business start-ups.
Figures due this week are likely to show little change in the growth rate of industrial production, investment and retail sales, while Green said exports may well post another drop.
China's customs authorities are still reversing fictitious shipments from earlier in the year when firms inflated reported exports to seize yuan arbitrage opportunities in Hong Kong.
CHINA SNEEZES, AUSTRALIA CATCHES A CHILL
Andy Rothman, a macro strategist for brokers CLSA in Shanghai, said the economy was not showing signs of either regaining speed or slowing more sharply. Full-year growth was likely to be 7.5 per cent, down from 7.8 per cent in 2012.
"The Party leadership is comfortable with this gradual deceleration and is focused on longer-term structural reforms, not on short-term stimulus," he said.
Pessimists zero in on China's galloping credit growth, which they say has paid for wasteful investments that have added to industrial overcapacity and will spawn bad loans.
But Rothman points to evidence that the economy is gradually shifting towards consumption from heavy industry. He said growth in the tertiary sector, which includes services, retail sales and real estate and accounts for 45 per cent of China's economy, accelerated in the first half of the year.
The rebalancing drive is sending ripples round the world, especially in commodity-producing nations that have fed Chinese industry's hitherto insatiable appetite for raw materials.
The Reserve Bank of Australia will cut interest rates on Tuesday by a quarter-point to 2.5 per cent, according to the unanimous verdict of economists polled by Reuters, to cushion the impact of the end of a long China-fuelled boom in mining investment.
"We believe Tuesday's statement will indicate that, even with the expected August cut, the Bank has the scope to do more if needed," economists at Citi in Sydney said in a note.
MARK MARK'S WORDS
Forward guidance on interest rates will also be on the agenda on Wednesday when the Bank of England (BoE) releases its latest inflation and growth forecasts.
New Governor Mark Carney is likely to put an early stamp on his tenure by setting out the economic conditions that will have to be met before the central bank raises its main policy rate, now at a record-low 0.5 per cent.
Many expect Carney to follow the Federal Reserve and link an eventual rise in borrowing costs to progress in reducing unemployment, which is currently 7.8 per cent in Britain. But economists disagree over the rate the BoE should target given uncertainty over how much slack there is in the economy.
Kevin Daly with Goldman Sachs said if the BoE chose an unemployment-based threshold, he would favour setting it at 6.5 per cent, while Robert Wood with Berenberg Bank said Carney was likely to opt for a relatively cautious threshold of 7 per cent.
"The aim will be to try and keep market interest rate expectations low to allow the nascent recovery to blossom into something stronger and more sustainable," Wood said.
In the United States, the recovery has advanced to the stage where the Federal Reserve is debating when to start scaling back, or tapering, its bond purchases of $85 billion a month.
Last Friday's employment report for July, showing fewer new jobs, a shorter average working week and a drop in hourly wages, pointed to softening momentum in the labour market that would make the choice facing Fed policy makers a bit more difficult, said Bruce Kasman, an economist with JP Morgan in New York.
"But fundamentally there's enough strength in this report and in the broader economy to keep them on track for the tapering decision which we think they're going to take in September," Kasman said. - Reuters