Tuesday, January 6, 2009

China's Economy: Back to the Future in 2009?

Everybody is talking about China's economic growth for 2009. An article in "China Economic Weekly" gives a run-down of the forecasts. The situation shows a lot of parallels with the Asian Financial Crisis of a decade ago. The article questions whether growth will plummet as it did in 1998.

A GDP growth target of 8% was set at the 2009 central economic work conference held on December 8, 2008. The slogan is "keep 8". There was a similar target ten years ago, and many overseas economists (notably Tom Rawski) suggested that the National Bureau of Statistics was overstating GDP growth to meet the target. The outsiders pointed to declining energy consumption and other indicators that implied to growth in the low single digits.

A China Academy of Social Sciences population and labor economics research institute vice director explained that the 8% growth rate is necessary to absorb surplus rural labor. He says, "if the economy cannot grow at least 8%, we cannot absorb the agricultural labor in the industrial and service sectors, causing big problems for our agricultural income, national development."

National Bureau of Statistics issued economic data showing GDP growth of 9.9% for the first three quarters of 2008, but GDP growth in the 3rd quarter was 9%, lower than forecast. NBS November industrial output growth was just 5.4%, raising differing opinions among industry insiders about whether the 8% target can be maintained in 2009.

The economists in charge of policy seem to be optimistic. The central bank vice director said in a speech two days ago, “Through the effects of the latest central bank surveys, GDP will certainly meet the 8% target, and may be faster.” The State Council Development Research Center Macroeconomic research office director Li Jianwei says his growth cycle model forecast shows domestic stabilization policies will result in 8.4% growth. He claims “8.4% could be low.” The CASS “Economy Blue Book” forecasts 9%. CASS quantitative and technical economics research center director Wang Tongsan says Chinese economy will be a little more than 9%, most likely.

But CASS researcher Yuan Gangming is more pessimistic. "I estimate 2009 GDP cannot reach 8%; it could be 7 or 7.5%. 4th quarter economic growth will be less than 7% because electicity consumption fell, 2009 GDP growth will be 6% at most; If policy adjustments take place in the 2nd quarter, money supply growth reaches 18% or more, growth could be 8% in the second half. But 2009 growth for the full yaer will be 7%."

Some foreign research organizations share Yuan’s pessimistic outlook. Standard Chartered Bank’s latest macroeconomic forecast puts GDP growth for 2009 at 7.5%. Ben Simpfendorfer of the Royal Bank of Scotland forecast is more pessimistic. He says, since consumption, real estate investment, and exports are down, 2009 Chinese GDP growth could be down to 5%; He forecasts just 4% for the first half of the year.

According to the December 26 NBS web site economic data, industrial enterprise profits for the first 11 months of 2008 were up 4.9%, down 31.8 percentage points from last year. Industrial value added was up just 5.4% in November. Normally, China’s industrial value added grows at 14-15%, so this is not a cause for optimism.

The article then asks whether a repeat of the 1998 slowdown is likely. China investment association vice director Zhang Hanya wrote in China Economic Weekly that foreign research organizations and other persons have a pessimistic outlook, mainly based on the 1997 Asian Financial Crisis.

Zhang explains, the Chinese economy grew rapidly after 1992 (14.2% in 1992, 13.6% in 1993) and investment and consumption both were increasing, with serious inflation, and the government started implementing macroeconomic controls. Double digit inflation continued for 3 years until 1996. Inflation was 24.1% in 1994. China achieved a soft landing in 1996.

Although inflation was controlled, starting in 1996, enterprises started experiencing losses, by the end of 1996 13 out of 14 large sectors (such as steel, coal) were experiencing losses. Under such circumstances, in 1998 the government implemented financial policies, issuing bonds of 100 billion yuan annually, reforming the housing market, and implementing urbanization policy, but in 1998 GDP growth was just 7.8%. After 5 years of aggressive fiscal policy, the economy began to recover in 2002.
“But this time it is different,” Zhang told the reporter. From 2002 to 2007 state owned enterprises' profits rose 20-30%, in 2004 the growth was 40%. State owned enterprises have 19 trillion yuan in cash deposits. In this international financial crisis, enterprises are strong. If enterprises can be resilient, the economy can bounce back.

“I estimate enterprises in the first and second quarters can rise up. Steel, chemicals, building materials already started their recovery. In this kind of situation, Our economy will not replicate 1998. It has been on the rise for 5 straight years. I see recovery in 1 year.” Zhang Hanya told China Economic Weekly, 2009 economic growth will start to recover in the first quarter, and will be high by the fourth quarter. “Annual GDP growth could be about 10% for 2009. I think 2010 first quarter economy could be hot again.”

The government announced a 4 trillion yuan economic stimulus package and the subsequent launch of some macroeconomic adjustment measures. The government is committed to stabilizing foreign demand and increasing domestic demand to meet the growth target. A lot of macroeconomic measures have been announced. Since there is a lot of economic inertia, all these policies could heat up the economy in the second half of 2009, according to Zhang.

This aggressive fiscal policy sounds familiar. Caijing economist Shen Minggao pointed out that large increases in domestic investment to increase domestic consumption and stabilize the economy could be the focus in the next two years. If consumption cannot be effectively stimulated, after a couple of years, China’s GDP structure will be even more skewed to investment, possibly exceeding 50% of GDP, the highest proportion in the world. According to World Bank statistics, capital formation was 43.9% of GDP in 2005, higher than all but 5 other countries.

"Only if domestic consumption rises, enterprises confidence can improve. Only if market demand is favorable will companies make investments. Market consumption demand is the most effective wasy to stimulate company investment, and the most suitable way to boost demand growth in the economy,” said Yuan Gangming.

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