China Slowdown Shakes Forecasters

Economists say expectations were too high.
An analysis by Michael Lelyveld
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A Chinese investor looks at share prices at a stock brokerage house in Hangzhou, 16 May 2012.
A Chinese investor looks at share prices at a stock brokerage house in Hangzhou, 16 May 2012.

Some analysts have slashed forecasts following China's recent economic reports, but market fears over this year's slowdown appear overblown, experts say.

A slew of slower growth numbers released by the National Bureau of Statistics (NBS) on May 11 has undercut higher expectations, leading to an outpouring of concern.

"We were wrong and we revise down growth forecasts," said Bank of America/Merrill Lynch in a blunt message to clients.

The results caused the analysts to pare back gross domestic product (GDP) predictions to 8 percent from the previous 8.6 percent for this year, Reuters reported.

The biggest concern was April's industrial production, which rose 9.3 percent from a year earlier at its lowest growth pace in nearly three years.

New bank lending fell almost 8 percent from a year earlier and 32 percent from March. Growth of fixed-asset investment neared a decade low for the first four months of the year.

In response, the People's Bank of China (PBOC) announced it would lower the reserve requirement ratio (RRR) for the nation's banks by 0.5 percent, effectively injecting 400 billion yuan ($63.5 billion) into the economy, the official Xinhua news agency reported.

"China's economy is even weaker than thought, with industrial production growth back in single digits for the first time since the global financial crisis and electricity production flat lining," said Alistair Thornton of IHS Global insight, according to the Associated Press.

'Under control'

But economists interviewed by RFA voiced less concern with the April results.

Pieter Bottelier, nonresident scholar at the Carnegie Endowment for International Peace in Washington, noted that Premier Wen Jiabao has already set a slower-growth GDP goal of 7.5 percent for this year to tame inflation and put China on a path toward more sustainable development.

"I'm a little surprised that the April numbers, particularly for industrial output, came out a little worse than expected, but I'm not inclined to think that this is indicative of any major problem or malaise in the Chinese economy," Bottelier said.

"If you look at the structural reforms that have been announced or undertaken in recent weeks, all suggest that things are under control and Beijing knows what it is doing," he said.

Bottelier said the government has shown its focus on longer-term structural problems by widening the trading band for the yuan and overhauling the tax system for the service sector to promote investment and job growth.

Among the more positive results, consumer price inflation fell to 3.4 percent in April from 3.6 in March, marking the third monthly period below the target level of 4 percent.

Premier Wen's campaign to reduce housing prices also appears to be getting results, creating more room to loosen tight money restraints.

On May 3, the China Index Academy reported that average home prices in 100 cities fell slightly in April both from a year earlier and a month before. The double-dip was the first since the government launched policies to push down prices two years ago, Xinhua said.

On Sunday, Wen suggested the crackdown on prices may have gone far enough.

"We should continue to implement a proactive fiscal policy and prudent monetary policy, while giving more priority to maintaining growth," Wen said, according to Xinhua.

High expectations

China faces tough external factors for its traditional export-led growth because of weakness in global markets, but much of the gloom over the April numbers is due to high expectations for an economy that has been driven by double- digit growth.

Even at a low of 9.3 percent, China's growth in industrial output would be the envy of most countries. And the decade-low level of fixed-asset investment growth still stands at a high-flying 20.2 percent.

"The numbers are certainly very good by world standards," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington. "Expectations both in China and abroad are extremely high."

In context, China's growth seems to be showing signs of moderate drag from inflation-fighting on the one hand and slow global recovery on the other.

"Given the state of the world economy, the sluggish growth in the U.S., the near-recession in Europe and very flat growth in Japan, this is really very good performance," Hufbauer said.

"It's only against the standards of the recent past when China was growing at double-digits ... that these numbers look like a disappointment," he said. "If China can keep up the current pace of growth, then it's doing better than almost everybody else."

China's latest decrease in the reserve ratio requirement is another example of comparisons. Even with the cut, the country's largest banks must keep 20 percent of their capital on hand.

Hufbauer said China's RRR is about twice as much as international standards. The PBOC pushed up the ratio as high as 21.5 percent last year in an effort to cool excessive lending, inflation and the economy down.

This year, the central bank will have room for more cuts, but the current levels serve as a reminder that China's problems until now have been the opposite of other major economies with looser monetary policies and slow growth.

Better data?

The April numbers have sent some economists scrambling to explain why the results were so far out of line with expectations of industrial output growth over 12 percent.

Bank of America economist Ting Lu speculated that the new NBS reporting system may have had something to do with it, Reuters reported.

Under the system announced in February, the NBS ordered 700,000 industrial, service, and real estate companies to report their data directly to the agency instead of through provincial and local governments.

The program covering companies that account for over 80 percent of GDP was intended to root out inflated figures, which local officials have used to advance their careers.

If Lu is right, some of the lower growth results may only be due to better data. But last month, NBS chief Ma Jiantang warned that officials were still trying to manipulate the results by pressuring companies to make sure their new numbers would match their previous inflated reports.





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