Chinese economic slowdown – some interpretations by East Capital’s Kristina Sandklef

China’s first interest rate cut since 2008 is analysed by Kristina Sandklef, macro economist at Swedish manager East Capital.

During the next few days we will get macro-economic statistics from China, which likely will support the fact that China’s economy is slowing down. Inflation is expected to be stable somewhat above 3 percent, whereas statistics for economic activities such as fixed asset investments (FAI), industrial production, retail, and trade are expected to be relatively weak. Adding to this, the May PMI showed that the Chinese economy is slowing down.

Today, the People’s Bank of China (PBoC) cut the benchmark lending and deposit rates by 25 bp, which was the first cut since 2008. The cut is a clear signal to the markets of a loosening policy and also another expression of concern from the top leadership on slowing economic growth.

As the China bears are roaring, I would like to make some points regarding the Chinese slowdown, on what to worry about and what not to worry about.

Summary:
• The slowdown we are now witnessing is partly made by the Chinese government after tightening measures were implemented last year to curb inflation.
• The Chinese economy is not as export dependent as it was in 2008, which makes it less vulnerable to external shocks. Even if exports to the EU are falling, they are increasing to the US, Japan, and South Korea.
• Rebalancing the economy, from investment and export dependent to consumption and innovation driven, will be painful, and decreasing energy consumption could be a sign of this rebalancing already starting.
• Slower economic growth will be accepted by the Chinese government before launching new massive stimulus programs, which could be dangerous for the Chinese economic structures in the long run as it will increase potential bad loans and corruption.
• Private investors are to be encouraged to invest in infrastructure, which could make these investments better and more sustainable.
• “Proactive fiscal policies and prudent monetary policies to sustain economic growth” are the new buzz words for the economic policies these days. So far the monetary policies involve lowering RRR and making it a bit harder to get loans for real estate projects.
• Proactive fiscal policies include speeding up approvals of projects already outlined in the 12th Five Year Plan to bolster growth within infrastructure, steel, clean tech, and consumption subsidy programs.

First of all, we have to bear in mind that last year, the Chinese economy was experiencing inflation following the massive stimulus programs in 2008/2009, and fighting inflation was the main target for the economy. The Chinese government implemented several measures to get inflation under control, which included restrictions on real estate purchases, which have had the effect of slowing down the Chinese economic growth. In comparison to 2008, we are witnessing a slowdown that has actually been instigated by the Chinese government. At the National People’s Congress earlier this year, the Chinese leaders lowered the GDP target growth to 7.5 percent and it seems like they are quite content with a slower economic growth as this will help the country to do the needed rebalancing of its economy and also to handle its resource consumption better.

In 2008, the Chinese economy contracted following the external shocks from the global financial crisis, mainly due to its export dependent economy. 20 million migrant workers lost their jobs in the export industry and as many of them returned home to the countryside, the main target of the huge stimulus program in 2008/2009 was to curb unemployment and potential social unrest. Today, China is not as export dependent as it was in 2008. In 2008, Chinese net exports accounted for 7.5 percent of GDP growth, whereas it only accounted for 2.3 percent in 2011. Even though the EU is China’s largest export market, and exports to the EU have fallen with 2 percent so far this year, exports to other countries like the US, Japan, and South Korea have actually grown by 12 percent (US), 9 percent (Japan), and 8 percent (South Korea). If Grexit happens, it is expected to mainly hit Chinese trade as trade financing will be affected generally, but the actual Chinese investments in and trade with Greece is quite small.

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