By Kristina Sandklef, Macro Economist Asia.
The newspaper headlines about China’s slowing economy may spell doom and gloom, but we have faith in the strength of the Chinese economy and believe it has great long-term growth potential – despite the days of double-digit growth probably being a thing of the past.
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First quarter figures showed that GDP grew 7.7%, compared to 7.9% in the previous quarter.
Despite that, we do not expect any large stimulus programs to take place, and we remain confident that despite growth at levels of around 7.5% this year, the Chinese economy remains a force to be reckoned with.
When the GDP growth figures were released for Q1, we were disappointed as we had expected growth to have bottomed out in Q3 last year, when GDP growth was 7.4% and Q4 ended at 7.9%. The infrastructure projects, which were approved by the National Development and Reform Commission (NDRC) last spring and summer, were expected to boost growth more in the first half of 2013. This together with an increase in March’s purchasing management index (PMI) figure to 50.9 and a rapid credit growth for Q1 also signaled that GDP growth would continue to gain momentum.
There are several reasons why growth slowed in Q1. Smaller than expected income increases and the government’s frugality campaign on conspicuous consumption and corruption made consumption slow. The tightening of the real estate market has affected demand for steel and cement, which slowed the growth of industrial value added production. New regulations of shadow banking and wealth management products (WMP), which are part of an informal bank system and have showed problems in the recent past, also affected growth negatively.
The reported credit expansions for Q1 were high and were expected to affect growth more. Finally, export figures were very high the first two months of the year, only to fall in March. However, the statistics do not seem to add up when compared to where China’s exports are supposed to have been shipped to. It gives us and other analysts, including the National Bureau of Statistics in China, a belief that the reported export figures could actually be wrong.
Should we worry about the slowing growth in China? We believe that the days of double-digit growth are gone and that we should get used to lower growth figures, maybe as low as to 6% in the future. Still, this does not mean that the Chinese economy has lost its potential, rather that it is now so big that it will take more effort to achieve higher economic growth. It is also important to note the shift in the new leadership, who are talking of quality of growth rather than quantity. Quantity, they say, has worsened environmental degradation and also generated unnecessary investments. However, the slowing growth worries investors who are mainly following the Chinese economic development by reading newspapers headlines. That is what creates market volatility.
Thankfully, there are many signs that growth is likely going to be a bit stronger over the next couple of months. First of all, the credit expansion that we witnessed in Q1 is expected to start to impact the economy as the new leaders are now installed all over China and projects that were on hold have likely been approved by now. Even if PMI was lower than expected for April at 50.6, down from 50.9 in March, this was mainly due to slowing exports.
We have also seen signals from the central government that there will be pro-growth policies. However, we cannot expect any large stimulus programs similar to the ones in 2008/2009, but rather investments in sectors which will generate long-term growth, like mass transit railway systems in bigger Chinese cities, improved energy saving and preventing environmental pollution, improvements to the health care system, better education, and other investments in urbanisation. Now is the time for restructuring of the Chinese economy to secure economic growth long term and avoid falling into the middle income trap. We can already see that much needed reforms are coming in the financial sector.
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