MONTREAL - The Chinese economy if facing a
hard first quarter amid slowing trade growth as
troubled developed countries hold back on export
orders and local demand stalls.
Export
growth slowed to 13.4% in December compared with a
year earlier, down from 13.8% the previous month,
while Chinese imports grew only 11.8% over
December 2010, well below the 17% consensus
prediction in a Reuters survey of economists.
Nomura's chief China economist in Hong
Kong, Zhang Zhiwei, told Reuters that the new
numbers mean "domestic demand is slowing down very
quickly" and exports will almost certainly
decline "over the next
couple of months". All in all, "the first quarter
is going to be very tough."
Fourth-quarter
2011 data for gross domestic product (GDP), to be
published next week, are now expected to the worst
for at least two years. Economic growth may have
slowed to 8.7% from a year earlier, according a
survey by Bloomberg News, which reports that UBS
AG estimates 7.7% growth this quarter.
There will be headwinds well into the
year. Chinese aluminum smelters, for example, are
now operating at a loss, and they may idle their
annual capacity nationwide by one-third in 2012 as
energy costs increase and prices fall, Bloomberg
News reported. Major global aluminum producers
such as Alcoa and Rio Tinto are cutting production
after a 19% decline in prices last year.
Despite the grim outlook, Chinese stocks
have gained strongly this week, a recovery
financial commentary attributed to lending and
money supply data for December that exceeded
estimates, raising hopes that the government means
to relax monetary policy.
The bellwether
Shanghai Stock Exchange Composite (SSEC) bounded
5.7% to 2,286 in the first two days of this week
from last Friday's close of 2,163. It maintained
its new level through Wednesday before opening
Thursday with a failed assault on the 2,300 level.
This week's move is in line with the
prediction on this site a month ago that the index
would find support "in the high 2,100s" (see Asia
looks for footing, Asia Times Online, December
10, 2011). The SSEC should still test the lower
level at least once more for confirmation, failure
of which would send it further down, possibly into
the 1,700s.
The
consumer price index (CPI) for December,
at 4.1%, came in lower than in previous years,
despite an increase in food price inflation from
8.8% to 9.1%. Central economic planners will
continue shifting their concerns from inflation to
the dangers of an economic slowdown to an
intensification of the cycle of easing monetary
policy, Nomura's Zhang noted.
However, the
dangers of an easier monetary policy have emerged
over the past year as awareness grows over how
poorly local-level lending and finances are
accounted. Even an analytical focus specifically
on the financial sector can risk missing the
problems that now clearly identified but have not
yet acquired an acute profile at the provincial
and municipal levels.
The main problem is
that enterprises that are state-owned at the local
level and also local-government financing vehicles
have had difficulties in generating enough cash to
cover their maintenance costs, such as insurance
and interest respectively. Unable to repay the
principal that they owe to banks, the latter find
themselves extending further credit to the former.
Smaller firms are already beginning to default on
debts, and borrowers cannot repay loans.
Land sales, from which local governments
derive a great proportion of their revenue, slowed
enormously last year as the central government
continued to enforce policies to restrict home
purchases. There are extensive reports that local
governments began to defer interest payments
towards the end of 2011, which only points to
further problems in rolling over original debt in
the coming year. At present the problem is
contained and limited, but its lack of resolution
will lead to bigger problems.
Many people
believe that the central bank will just print more
money and continue lending large amounts of it to
the already indebted firms. This is, indeed,
effectively what other central banks are doing.
(It is not literally "printing money" in the
physical sense, since these tend to be financial
accounting numbers transferred from ledger to
ledger rather than actual cash being distributed
to the population for purchase of goods and
services.)
The Chinese central bank
continued to print money in 2011 although
reportedly at slower rate than in 2010 or 2009.
The national economy nevertheless remains addicted
to liquidity. Such a solution raises the danger of
falling into a liquidity trap, which is a
situation where cash injections into the economy
fail to lower interest rates and hence fail to
promote economic growth.
In a liquidity
trap, people hoard cash because they expect
economic and/or political adversity (Commerce
Minister Chen Deming last week said the government
intended to introduce measures that will encourage
consumer spending); property values and prices
decline; speculation in esoteric commodities
increases; those who are able to do so move their
money offshore.
As the indebted entities
cannot pay their bills or service their loans, the
central bank may well feel that it has no choice
other than to print more money. Indeed, December
data for M2 money supply published on Sunday hit a
four-month high. M2 includes all coins and
currency and demand deposits (such as checking),
time-related deposits, savings deposits, and
non-institutional money market funds.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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