China’s Economy in 2009 and Beyond

From RGE

....it is clear that China faced a severe deceleration of growth in H2 2008 based on a number of indicators: GDP which was close to zero on a q/q basis, industrial production, production of electricity, PMI, weakness of auto sales, fall in residential home sales, manufacturing data, falling imports and exports. In fact, calculated on a q/q basis like most other countries, Chinese growth (which is reported only on a year on year basis) was practically zero and even negative by some private sector estimates.

However, there are greater signs of economic recovery in March from the depths of Q4 2008 and most forward looking indicators suggest that Q2 2009 through Q4 2009 growth will accelerate relative to the dismal Q4 of 2008 and weak Q1 of 2009. In particular, economic data for China (including loan growth, the PMI, recovery in residential sales volume – if not prices, and public investment) do point to a stabilization or even slight improvement but we at RGE Monitor still see risks that Chinese growth will be well below the government target of 8% and even below the 6.5% level that the IMF and World Bank are predicting – a figure of 5-6% seems more likely. The more optimistic outlook for Chinese growth would require a recovery in the global economy, especially the U.S. in the second half of 2009, a development that seems more likely to come in 2010. It seems too soon to point to an economic recovery, particularly in the absence of a rebound in demand from the G3 economies (U.S., EU and Japan) which absorb most of Chinese exports.

.....There are other risks to this scenario. First, the Chinese policy stimulus could turn out to be insufficient and further stimulus could be delayed. Second if a drugged recovery – via easy money, loose fiscal policy and easy credit – leads to further over-capacity (of which there is some evidence), it could result in rising non-performing loans, falling profits or rising losses.

.....But the gap between a very weak U.S. and global economy and the Chinese growth target of 8% for 2009 is wide and given the sluggish outlook for the U.S. and global economy, China may continue to grow below potential in 2010. There is also another important caveat: even once the U.S. economy recovers, it will rely less on consumption and imports and more on an improvement in net exports. The world where the U.S. was the consumer of first and last resort – spending more than its income and running ever larger current account deficit – and where China was the producer of first and last resort – spending less than its income and running ever larger current account surpluses – is changing.