MONTREAL - Today, Thursday, the Chinese government released statistics showing
that the country's economy grew at at an annualized rate of 6.8%, the slowest
pace in seven years, during the last quarter of 2008. The performance follows a
Fitch Ratings estimate at the end of last week that full-year 2009 growth would
fall to 6% or below.
The World Bank continues to insist on a 7.5% growth rate for the current year,
based on the increasingly doubtful assumption of growing domestic demand. The
International Monetary Fund has bruited a possible growth rate of 5%. Other
estimates are being revised downwards, some even into negative territory.
It has generally been agreed that the economy needs a minimum
8% growth rate to maintain levels of production sufficient to prevent
unemployment (and attendant social unrest) from increasing. Current revisions
of estimates are falling too far below that level for the difference to be
trivial.
These new statistics for the last quarter of 2008 follow a previous report of
decline in China's gross domestic product during the third quarter to 9%,
making now six consecutive quarters of decline, even following a new revision
of figures for 2007 raising the growth rate from 11.9% to 13%.
Neither the organizational management nor the statistical methodologies of
China's National Bureau of Statistics are immune from political pressure from
above and the desire of their underlings to inflate numbers. It appears that
there is a politically driven bias also in favor of smoothing curves, that is,
artificially removing the fits and starts and jumps and spikes that are
characteristic of actual economic life.
Observers and analysts have therefore sought other indirect economic measures
of economic growth. Most of these (statistics such as electricity production,
construction and industrial production, as well as fixed investment and retail
sales) show no significant increase in the rate of growth.
Thus manufacturing has been declining for at least five months across nearly
every industry surveyed, although indirect statistics suggest that this decline
may be stabilizing at least in the short term. However, export orders, output
and new orders are all down. Companies are trying to protect market share by
cutting prices. This reduces the benefits that could accrue from producers'
lower costs, even as companies stop recruiting new personnel and let current
staff go.
However, neither the Hang Seng China Enterprises (HSCE) Index for shares of
mainland companies listed in Hong Kong nor the Shanghai A-Share Stock Price
Index, sometimes called the Shanghai Stock Exchange Composite (SSEC), reacted
much to the bad news, posting small gains.
It is worthwhile sometimes to compare the two benchmarks. The first is a
freefloat capitalization-weighted index that includes H-Shares on the Hong Kong
Stock Exchange and is part of the Hang Seng Mainland Composite Index, while the
second is a capitalization-weighted index following Shanghai Stock Exchange
A-shares that are restricted to local investors and qualified institutional
foreign investors.
The HSCE is in general more exuberant. It has held up much better than the SSEC
from the late 2007 highs, particularly from mid-March to mid-September 2008. It
also has done much since the late-October trough last year, although that is
largely because its October 27 low was off over 30% from a week before, whereas
the SSEC's low that day of down only half as much proportionally.
Even allowing for the overnight 3.5% gain in the Dow Jones Industrial Average,
it may seem odd that the Asian stock markets were slightly up during the day.
Outside China, other significant bad news included a 35% drop in Japan's
exports in December from the year previous and South Korea's fourth-quarter
economic contraction of 5.6% (much more than expected and the largest decline
in over 10 years).
The predominant narrative to "explain" this seems to be the assumption that
governments in Asia and elsewhere will strengthen measures to ease the
financial crisis and palliate the worldwide recession: a variant on the "bad
news is good news" theme.
In the case of China, some analysts hope that the economic stimulus beginning
last October will cushion the slide and help keep overall growth in 2009 at
least over 7%. However, there are formidable obstacles, including decreasing
external demand, the elimination of raw materials overstocks, and declining
investment in construction and real estate, that will weaken the Chinese
economy through at least through the first half of the year, if not beyond.
It is unlikely that government measures will be able to arrest the decline in
production. Other developments, including declines in global demand for
exports, in investment, and in domestic demand (as a result of declining
employment figures) all conspire to make 2009 more difficult than even yet is
generally suspected. Moreover, even if investment in production picks up later
in 2009 due to government stimulus measures, this will not do much good if
domestic and global demand does not match it.
A consensus is thus emerging that the Chinese government's stimulus as
presently configured will not be enough, and that additional monetary and
fiscal measures will be necessary, from which comes the aforementioned belief
that governments will do more. However, Thursday's bad news was significantly
worse than expected and has not already been factored into equity prices.
Therefore, what we have is a case of willful self-blinding and wishful
thinking, indicating that further losses will be necessary before a first cycle
of capitulation is complete.
Robert M Cutler (http://www.robertcutler.org) is a Canadian
international affairs specialist.
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