China’s third quarter growth slowed to 9%, a faster deceleration than most experts forecast. Conventional wisdom has held that China’s expansion would fall as low as 8%, which would feel like a recession internally. However, with growth having already falle to 9% before the credit crisis hit the worst of its latest acute phase, and with international shipping falling rapidly, the 8%-growth-as-bottom assumption may be breached.
China’s economy grew 9 percent in the third quarter, the slowest pace in five years, underscoring concern that the spreading financial crisis threatens the biggest contributor to global growth.
The median estimate of 12 economists surveyed by Bloomberg News was for a 9.7 percent expansion, after a 10.1 percent gain in the previous three months. The statistics bureau released the data in Beijing today.
China may cut interest rates for the third time this year after weaker export orders and factory closures for the Olympic Games damped industrial output. The nation will raise investment in infrastructure and boost export-tax rebates to protect the economy from the increasing risks posed by the financial turmoil, the cabinet said yesterday.
“There are no options for the Chinese government except to stimulate the economy — more monetary easing is needed,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. She predicts five rate cuts by mid-2009 and the abolition of quotas that limit banks’ lending.
Inflation cooled to 4.6 percent in September from 4.9 percent in August.
The CSI 300 Index of stocks fell 0.8 percent as of 10:28 a.m. The yuan traded at 6.8293 against the dollar, from 6.8296 before the data was released.
Paul Kedrosky had China on his mind today; among other things, he featured a Far Eastern Economic Review article by Brian Klein, “The Great Crash of China” from last month that generated a good deal of controversy by taking a jaundiced view of the China’s outlook. The gist of the argument is that demand for cheap Chinese exports is falling rapidly, forcing China to transition into having domestic consumption play a much large role. Moreover, the officialdom does not appear to embrace shifting China towards a markedly higher level of domestic consumption.
From the Far Eastern Economic Review:
Conventional wisdom holds that China’s domestic demand is increasingly responsible for driving growth, not exports, giving the Chinese economy a natural buffer against wild swings in the world economy. …
At first glance the statistics look promising. Consumer spending is up 22%, inflationary pressures are receding as food prices drop, and strong foreign exchange reserves continue to accrue ($1.8 trillion as of July). Fixed asset investment is rising as well (up 27% in the first eight months of 2008) and China’s sovereign debt rating is improving (S&P has raised long term ratings to A+.)
On closer examination, however, a vastly different story emerges. By the end of 2007 almost half of China’s GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.
While savings rates have been traditionally high, immense wealth has been invested in the stock market and real estate. The Shanghai index lost two-thirds of its value since its peak in mid-October 2007 and the Hang Seng is down over 50% from its peak a year ago.
While fixed asset investment may be rising, one-third is continuing to pour into the real-estate sector (up 29% year-on-year) despite vacant commercial floor space in China rising by 6.1% at the end of July (the latest month for available statistics). Real estate prices are experiencing their slowest growth in 18 months and new home prices in Guangzhou and Shenzhen have actually declined. Meanwhile growth in new car sales, while still robust, is slowing.
Not surprisingly, consumer confidence, according to official Chinese statistics, is drifting downwards…
Guangdong Province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year. These are some of the low-skill, low-wage jobs China wants to replace with high value-added manufacturing. However, there has been very little preparation for laying the foundations for such an economy….
Laid-off factory employees, along with millions of migrant construction workers likely to be left jobless as construction slows, will return to a countryside largely unchanged from when they left years before. It should come as no surprise then that demonstrations against local officials in smaller cities quickly escalate into “mass incidents.” Fixed investment in education, health, and social programs accounted for a paltry 2.3% of the total through July.
Unless current expansionary monetary and fiscal policies are directed at skills development, an expanded intellectual property rights enforcement bureaucracy and research and development capacity, China may be running headlong into a great economic brick wall. Rising middle class expectations, shrinking manufacturing jobs, and a lack of qualified workers are more of a threat to continued economic growth than the People’s Bank of China’s exposure to U.S. Treasury bonds.
Economic development has been the foundation of social stability and party legitimacy for the past several decades. Premier Wen, in his recent UN speech, reaffirmed China’s commitment to reform and opening. That entails some hard choices regarding China shifting away from its traditional focus on low-end production. As the world economy continues to flounder (and most expect a U.S. led turn around is at least a year away) China faces the fading memories of a successful Olympics and a wave of unemployed workers with very little to cheer about.