China’s Growth Slows to 9%, Below Expectations

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.

From Bloomberg:

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 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.

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  1. Anonymous

    I don’t believe that monetary easing will provide a tangible stimulus as too many are loosing jobs [“There are no options for the Chinese government except to stimulate the economy — more monetary easing is needed”] and not enough left with income to spend.

    “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”.

    I think fiscal stimulus is the only remedy with a *huge* investment in public works.

    Setser said on 15 October “But there isn’t much evidence of a slowdown in China’s exports yet. Nominal export growth is chugging along at about 20% y/y – which implies the China is on track to export about $250 billion more this year than last year.”

    The only ones surprised by weaker than concensus figures must be the only ones who held on the decoupling theory until it was irrefutably shattered.

    I was just reading GMO’s 3Q report today [ ]”Moving back to our armchair at 56,000 feet (don’t you miss
    the Concorde?), an amateur economist could summarize
    and simplify the Chinese economy as 39-37-37: an
    astonishingly large 39% of the GDP is capital spending,
    37% is internal consumption, and an amount equal to
    37% of GDP is exported. (These numbers do not sum to
    100 as we are not using exports net of imports because
    we are concerned with the vulnerability of total exports
    to a weak global economy.) The U.S., in comparison, is
    19-70-13, disturbingly on the other side of normal; 70%
    consumption compared with 57% in both Germany and
    Japan, for example, and nearly twice that in China. China’s
    mix is of course an utterly unprecedented one, and comes
    with great advantages in booming times. Now, however,
    we might ask: how do you stimulate the building of a new
    steel mill when rows of mills are sitting empty? How do
    you increase exports into a global economy that is not just
    slowing, but is unexpectedly very weak? And are they
    good enough at stimulating local consumption to have an
    impact on such a small percentage of GDP in the face of
    a negative wealth effect from declining stock and housing prices in their local market?”

  2. baychev

    it is naive to expect communist apparatchiks to navigate this lopsided ship through a rocky and stormy strait without grave consequences.
    this is a government managed economy: you get credit from the bank to produce only what the gov’t deems necessary. and you have to be connected politically which implies no know-how.
    it is really interesting how this will play out between china and the US. maybe they will form together a socialist alliance of some sort.

  3. Bertel Schmitt

    Politicians and business people all over the world would sell their first born for 9% growth. When China goes from unsustainable, unhealthy and inflationary double digit growth to a "mere" 9% then that's no "Great Crash Of China."

    Sure, export growth will slow substantially. It already does. Look at container rates. They are giving them away.


    – Retail sales in China rose 23.2 percent in September from a year earlier, matching the gain in August and close to the fastest pace in at least nine years.

    – Urban disposable incomes for the first nine months rose 14.7 percent to 11,865 yuan from a year earlier. Rural cash incomes climbed 19.6 percent to 3,971 yuan.

    – The formerly red-hot Chinese light vehicle market (which includes passenger vehicle and light commercial vehicle segments) is expected to slow in 2008, but it still will grow at very healthy rates. J.D. Power expects Chinese light vehicle sales to come in at 8.9 million units in 2008, which would be an increase of 9.7 % compared to 2007.

    – Much of the decline in exports had been caused by the appreciation of the RMB, which was actually a reflection of the rapid depreciation of the USD which took place until July 2008. As said, "For most local auto parts makers, the impact on exports brought by the demand slowdown of the global market triggered by the financial crisis will be less than that of the RMB appreciation."

    If anybody has noticed, the USD, and especially the Yen took a sharp turn and appreciated dramatically since July. Now is this reflected in the USD/CNY currency pair? Have a look at the chart: Until July, the Yuan pretty much appreciated against the USD as the Euro.

    When the USD started raising like mad starting in July, the USD/CNY rate barely budged. The EUR/CNY rate moved.

    The only misguided sentence in the Bloomberg report is "The central bank has stalled gains by the yuan against the dollar since mid-July, protecting jobs in export industries." Jeez, they did the opposite. When the Yuan should have gone down against the USD along with the other currencies (except the Yen, but that's a different story) the Yuan barely moved. The Chinese central bank propped up the yuan against the US dollar.

    Expect this to change radically within the next months, latest after the U.S. elections. We expect the yuan to drop against the USD, the easiest way for the Chinese government to make Chinese exports more attractive. In the first half of 2008, this would have been a rather unpopular move. But now, the world has other problems than watching the CNY/USD currency pair. And when the USD will drop as America cranks up the presses to print money to finance the bailout and two wars, the Chinese can keep the CNY/USD level, and make their goods even cheaper in Euro terms.

    China is the country that keeps the world economy alive. The Chinese have the incentive and wherewithal to keep it that way. They have nearly unlimited room to grow, while Western market are saturated and while especially European and Japanese demographics indicate shrinking markets. Out of this recession, China will emerge stronger than ever.

  4. Bertel Schmitt

    @ baychev: You really need to get here to see these “communist apparatchiks” in action. I’ve live all over the world, and nowhere have I seen more blatant capitalism than here. The “communist apparatchiks” did a much better job with their country than some others ….

  5. Anonymous

    More investment in infrastructure? In China? That’s like throwing gasoline on a fire. Echoing an earlier comment about empty steel mills, it is hard to see how more infrastructure/fixed assets are going to help in a country where they have arguably been in oversupply for the better part of a decade.

    When China feels the need to ‘stimulate’ its economy, then you have a sign the world has truly gone mad.

  6. baychev

    you bring up good points.
    – how about salary caps at private companies 150% those of government owned competitors?
    – are you aware that china has only about 40% urban population? in contrast, developed countries are at about 70-80%. do you think there is rome for another 300-400 million industrial and service jobs there?

    the gov’t is ripping off its people and amassing huge currency reserves that ironically amount to $1,500 per capita. is that really sufficient to prop up domestic consumption when the external markets shut down due to their own economic woes? i would guess you are native a big net european exporter. when europe’s exports to the usa go down, consumption of chinese goods by those factory workers dries up quickly.
    just becuase there is room for improvement does not mean that the country is self sufficient. it is not. it is heavily dependent on exports to the usa/eu and its destiny is closely tied to the health of its customers.

  7. Anonymous

    “are you aware that china has only about 40% urban population? in contrast, developed countries are at about 70-80%. do you think there is rome for another 300-400 million industrial and service jobs there?”

    baychev, I am not sure if you are stupid or just ignorant. Every country start out from a large rural population toward a urban population. Jobs get created in the industrialization process. Is that Rome for 300-400 jobs? Well, Rome isn’t built in a day.

  8. Juan

    Anyone like to comment on recent changes in land rights in China and what impact these will have on rural unemployment, downward wage pressure and internal migration?

    anon 6;08,,,yes, jobs are created in the process of industrializing but industrialization tends towards higher capital to labor ratios which is to say _relative_ diminishment of employment opportunities even as those requiring employment has very likely been rising.

    Late development can transform from benefit to curse.

  9. baychev

    to anonymous October 20, 2008 6:08 PM,
    if you wish to call me stupid or ignroant, feel free to.

    apparently you did not get my point: at present levels of industrialisation (3-4m new urban jobs per year) it would take china 100 more years to become developed, bar population growth. with annual wages of less than $2,000 per worker, it would take quite a few years to measure up to the BR in BRIC.
    and given those paltry incomes, for how long retail sales will continue growing at 23% vs 14% for incomes? or maybe the sales growth is all due to food inflation which consumes 70% (guestimate) of the income.
    ahhhhh, and the bigest ifs of all: when exports slow, what will the impact be on the present employment picture?
    get real. china is still a feud with communists running it. if the economy is hit by this crisis, there will be revolution there.

    they make great products, but their economy is just as lopsided as the u.s.’s is and dont expect when the rich suffers, the servant to get by easier.

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