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In an effort to cool its hot property bubble, China put in place measures to curb speculation in the market. Policymakers also deliberately moved to cool growth with successive RRR rate hikes to curb lending as the economy continued to rebalance.The cooling seemed to be working.
But a string of weak economic data in April is causing everyone to panic.
Even the policymakers seem to be nervous as indicated by a surprise interest rate cut yesterday. Analysts think the move was timed to take place before 1) China’s massive economic data dump this weekend and 2) as a preemptive move before the Greek elections on June 17 which could increase global financial stress.
Clearly Beijing has taken notice with policymakers now shifting focus back on growth. We walk through some key points that has everyone worried.
China has come a long way from reporting 14 per cent GDP growth back in 2007, to 8.1 per cent in the first quarter of 2012.
The weak GDP growth has been attributed to weak external demand hurting Chinese exports and weaker investment spending. Chinese policymakers have already changed their tone and are focusing on growth. Many analysts have cut their second quarter and full-year GDP projections for China.
Chinese HSBC Flash manufacturing PMI came in at 48.7 in May, and a reading below 50 indicates contraction. This was the seventh consecutive below 50-reading.
And the new orders and export order sub-indices both declined on a monthly basis showing that investment appetite of Chinese manufacturers isn't back just yet.
Meanwhile, official PMI fell to 50.4 in May, from 53.3 in April and analysts said official reading was finally catching up with the flash PMI reading.
Again the sub-indices were worrisome. New orders fell to 49.8 and finished goods inventory climbed to 52.2 showing that manufacturers weren't selling as as fast as they used to.
The pace of Chinese export growth fell to 4.9 per cent YoY, down from 8.9 per cent the previous month. Meanwhile, imports climbed just 0.3 per cent, YoY against expectations of a 10.9 per cent jump.
Societe Generale analyst Wei Yao has said imports can act as an indicator for Chinese hard/soft/bumpy landing watchers since it can easily be cross-checked with its trading partners. Import slowdown reflected weakening demand for both non-commodity ordinary imports and raw materials, and since import demand centres on investments this also acts as an indicator for investment growth.
China's fixed-asset investment (FAI) growth has been disappointing and net FAI accounts for over 50 per cent of Chinese GDP growth. FAI growth eased to 20.2 per cent year-to-date in April, down from 20.9 per cent in March. In just the month of April FAI growth slowed to 19.2 per cent YoY, from 21.1 per cent the previous month, and 26.1 per cent a year ago.
FAI growth has been strong in the primary industry (farming, fishing and forestry etc) but has slowed in manufacturing, transportation infrastructures. There was a sharp slowdown in property investment-led FAI growth. From Morgan Stanley analyst Helen Qiao and her team:
'We expect FAI growth to weaken from the current level, before a strong rebound in 3Q-4Q2012. In particular, our forecast suggests the most notable pickup will come from infrastructure investment …while manufacturing investment holds up relatively well at this level. We expect the government to support investment from budget adjustment fund, and meanwhile encourage banks to lend more to these projects with robust repayment capacity.'
In 2008 - 2009, China introduced a 4 trillion renminbi investment package to help the economy weather the recession. The package worked at the time pushing growth back to 10.5 per cent in 2010. But the fallout from that is being felt now according to CCB International Securities analysts Banny Lam and Rocky Zhang.
The slowdown in the global economy caused demand for commodities to fall and it became evident that Chinese companies were making more than the market needed. From Lam and Zhang:
'Today, China's manufacturing industry, and by extension the entire economy, is suffering from massive overcapacity in both infrastructure and industrial production causing prices to plunge, utilization rates to fall, profits to decline and the number of bad bank loans to rise.'
China's inflation was brought within the government's comfort zone of 3 - 4 per cent, but now weakness in international commodity prices is impacted China's raw material import costs and this is contributing to easing inflation.
Naturally, policymakers are concerned about the impact of external events on employment. The 2008 global financial crisis resulted in deflation that dragged down exports with negative consequences for employment.
The World Bank estimates that 49 million rural migrant workers in China lost their jobs between October 2008 and April 2009.
About 24 million of those jobs had been regained by April 2009, and China has been pushing hard to rebalance its economy to become less reliant on exports, but the impact on labour is still cause for concern.
Morgan Stanley analyst Helen Qiao and her team write that unemployment has deteriorated and needs more attention.
'Without effective policy relaxation and financial condition easing, we believe wage growth and consumption demand could be at risk of being crippled in a bumpy macro adjustment process.'
In an effort to control their property bubble, Chinese officials introduced restrictions on lending and home purchases, all of which as caused real estate investment to fall.
Housing prices are expected to continue to fall and the flip side of this according to Patrick Chovanec is that this real estate investment will flatten out or start falling, erasing several percentage points of GDP growth. From Chovanec:
'China's developers are playing out a kind of prisoner's dilemma: rush to complete, in hopes of cashing out. But while supply keeps going up, demand is going down.'
The non-performing loans ratio (NPL) among Chinese commercial lenders is projected to rise to 5 per cent this year, according to S&P. The value of outstanding NPL's at Chinese commercial banks jumped 4.9 per cent or 20.1 billion yuan in the the fourth quarter
Recent reports in Chinese publications state that China's banking regulator is investigating lenders' loan classifications after it noticed a discrepancy between a rise in some categories of problematic loans and a decline in non-performing loan ratios over the past few months.
China has been concerned enough about its shadow banking industry, which Societe Generale puts at somewhere between 14 - 15 trillion renminbi, that it has rolled out a pilot program in Wenzhou that would allow informal lending institutions to register as private lenders or become rural banks.
New bank loans fell 33 per cent month-over-month in April and last month reports emerged that China's biggest banks could miss their loan targets for the first time in seven years as China's slowdown was hurting demand for credit.
But newer reports show that loans from all banks could have come in at 800 billion renminbi for May. The concern is that this is a desperate effort on the part of the government to meet its loan targets and that the money is just being pushed into local governments and state-owned enterprises instead of being channeled into areas of the economy that need the funds.