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Earlier this week BHP Billiton said iron ore demand in China is flattening. This was followed by a drop in PMI, all of which sent talks of a Chinese hard-landing into overdrive.But Ting Lu, China economist for Bank of America-Merrill Lynch, said he disagreed with sell-side analysts that were drawing on weak steel and auto-data in the past two months to claim that China is in a hard landing.
Lu, the #1 China economist according to Bloomberg, cites four key reasons to explain why he doesn’t see a hard landing:
- The manufacturing sector, which is said to be slowing, accounts for 47 per cent of the economy. However, the services sector accounts for 43 per cent of GDP, and agriculture 10 per cent. Lu says growth in the service sector has been resilient especially in retail and financial services. This is offsetting a lot of the weakness in manufacturing.
- Even within the manufacturing sector, some parts are doing better than others. While cement and steel output have slowed, mining and oil refining are still strong.
- Fixed asset investment (FAI), which is a measure of capital spending and an indicator of investment trends, has been strong. FAI grew 21.5 per cent year-over-year in January and February. And FAI and industrial production don’t always track each other closely. For instance in late 2007, FAI fell ahead of industrial production growth. Lu adds, “Strong FAI demand points to a rebound in steel and cement output in coming months.”
- Finally, Lu says auto sales don’t always suggest weak consumption. “Autos are durable goods, and that means weak sales would follow a period of strong sales, especially after the expiry of subsidies.”
For now, Lu expects 8.3 to 8.5 per cent year-over-year GDP growth in Q1 2012, and a seasonally adjusted 1.8 per cent quarterly growth.