Tuesday 20 January 2009

Chinese growth falls from "very high" to just "high" but at what cost?

As economists we are paid to be gloomy and this blog on China is no exception as regular readers will know. It is good to see that the Finanical Times has jumped on the bandwagon.

Readers will have been expecting these figures. The only issue from my perspective is how much the Chinese government will spend to maintain growth at above 6%? I suspect it will be a lot. Yesterday's post on "rising unemployment" demonstrates how actively the Chinese government is involved in managing the economy.

What today's FT article highlights, and is something I have been interested in for some time, is the extent to which FDI into China was really just "hot money" looking for high currency returns hidden under the guise of FDI. This would explain why actual FDI is so much lower than "planned FDI" in all the official statistics.

China’s hard landing [FT]

Ouch. It may not be a recession in technical terms, but China’s data dump this week is expected to show a pretty hard landing occurred in the fourth quarter. Private sector economists reckon economic growth decelerated to about 6-7.5 per cent on
a year-on-year basis, or about half 2007’s 13 per cent rate.
Compared with the third quarter, on a seasonally adjusted annualised basis, output probably contracted.

The one-time engine of global economic growth has been spluttering as a result of dented global demand for exports and over-zealous tightening policy at home. A hard
landing, like recession, adds new fear to the mix. With shares and real estate worth sharply less, unemployment rising and deflation round the corner, companies and
households are already reluctant spenders
; household savings deposits rose by more than 20 per cent in the year to November. Foreign hot money, too, has turned tail as currency appreciation abated. Opacity on foreign exchange reserves makes it ifficult to draw watertight conclusions, but reserve accumulation last month heavily undershot the sum of the trade surplus and foreign direct investment. Further adjusting for estimated valuation and other changes, Stone & McCarthy Research Associates estimate that unexplained residual outflows totalled about $120bn-$140bn in the fourth quarter.

For bulls, this is all part and parcel of being a paid-up member of the global economy: growth and liquidity cycles wax and wane. Last month’s loan numbers were reassuringly robust, showing a 19 per cent year-on-year increase in local currency lending (flattered by a low base) and the upswing should see investment return to form. That looks overly optimistic given other data points. The sharp deceleration in industrial production, which by November was already running at one-third early 2008 levels and likely fell further last month, hardly sets the case for corporate investment. Persistent over-capacity underlines the point. China’s days of double-digit growth are probably over.


1 comment:

Ninad said...

Quite interesting ...