As global growth slows, all eyes are turning toward China, whose rising economy has been compensating for slower growth in the developed world. This week, following several months where the impact of the global slowdown on the world’s second largest economy has been clearly evident, the latest output figures from China show signs of a slight improvement.
The official Purchasing Manager’s Index (PMI) rose to its highest level since July, reaching 50.2 in October, a marked improvement on September’s figure. (A reading of 50 or higher suggests that the economy is expanding ). “The manufacturing sector has resumed expansion, and we expect to see a cyclical upturn in China’s GDP in the final quarter of the year,” said Li-Gang Liu, Head of Greater China Research at ANZ bank. He added that the expansion will “not be as strong as past rebounds.”
Seasonal factors, including orders for the Christmas market, may be a factor in a slight improvement in new export orders, which rose .5 percent in October, said Liu. But internal factors are playing a role. China has been making a concerted effort to bolster domestic consumer demand, so that it won’t be so reliant on export orders. In May, Liu noted, the Chinese government eased fiscal controls, setting aside for the moment its concerns over inflation. The government approved new investment projects.
In 2009, as the global economy slipped into recession, China rolled out a massive infrastructure spending program to pump-prime its economy. This time around the Chinese government has so far refrained from any similarly large stimulus measures, despite slowing orders from the west and Europe in particular. Zhu Haibin, Chief China Economist for J.P. Morgan, noted that unlike in 2009, China’s “inflation rate is now relatively stable, and the labor market is also more stable.”
ANZ’s Liu agreed it was a sign of the government’s relative confidence in the economy that it had not used a fiscal stimulus. He predicted that China’s GDP growth would reach 7.8 percent for the year, higher than the official target of 7.5 percent, and could be as high as 8.1 percent next year – adding that “export demand could rebound somewhat” in both Europe and the US, amid “initial signs of recovery” in these parts of the world.
Still, risks for the Chinese economy remain. Beijing has this year sought to rein in lending by state banks to local governments, fearing they will over-invest in infrastructure and increase their already high levels of debt. But J.P Morgan’s Zhu noted that local authorities have still found other ways to raise funds, by taking advantage of new rules allowing governments in some parts of the country to issue more bonds. “We see more risk accumulating in the shadow banking sector,” he added.
And there are continuing concerns that small and medium enterprises are still struggling to raise funds and gain access to bank loans, despite being hard hit by the slowdown in export orders over the past year. The HSBC PMI Index, which tracks smaller exporters, showed a slightly lower figure than the government’s -- 49.5. And Zhu Haibin said that while bank lending to such businesses had increased recently (in part due to the current restrictions on lending to governments and state firms), “this is still really only a correction of past policies” - and its impact was therefore still relatively limited.
Analysts also say that there is still a web of other factors holding back growth in China’s economy. The manufacturing slowdown, combined with rising costs, has seen profit margins fall. Retailers have been hit too, according to Paul French, Chief China Strategist for Mintel. “They’re facing spiraling rents, rising wages and soaring costs of logistics and energy,” he notes. “For some companies that means double digit cost rises on margins of 2 percent.”
The result, say observers, is a slowing growth in new investment by businesses, and in the creation of new jobs. This in turn has played a part in holding back the faster rise in consumer demand that the Chinese government has long dreamed of. Luxury spending remains relatively strong, says French, though growth has softened somewhat over the past year. But he adds that “China’s middle class is still not big enough – still really only 13 to 14 percent in big cities like Shanghai and Beijing.” And he says that such people’s wages have been growing more slowly than the national average of 13 percent in recent years – while they continue to face high property prices and worries about China’s incomplete welfare system.
“It’s having a psychological effect,” he says. “The middle class were bullish – now they’re feeling squeezed and getting nervous. They’re worried about having to look after their parents, about their own pensions, about the cost of living.”
Li-Gang Liu of ANZ, however, argues that the fact that “property prices have not fallen much”, despite government measures to cool the real estate market over the past year, will give at least some members of the middle class “more confidence,” since so much of their money is tied up in real estate – and this could help to boost consumption growth. Sales of property remain flat – though J.P. Morgan’s Zhu argues that underlying demand for housing remains strong, and can sustain growth in China’s housing market for another 5-10 years.
Zhu also suggests, however, that investment efficiency needs to be improved – and he says that China needs corporate tax cuts to stimulate long term growth, as well as increased scope for private sector investment. (He notes that there has been some opening of infrastructure and energy sectors to such investment in some parts of the country this year.)
Zhu says he expects “China’s new leaders will pay more attention to economic restructuring” following the transition to a new generation of top officials in the Communist Party later this month, and in the government next March. Yet with continuing calls to reduce dependence on manufacturing and focus more on promoting domestic consumption, the challenges for China’s new leadership remain severe.