China's slowdown fears ease
By Robert M Cutler

MONTREAL - Fears that China's economy would suffer a hard landing, with a severe slowdown in growth as the government attempts to pull down inflation, have eased, with the latest data pointing to a slower-than-expected decline in expansion and inflation at a 15-month low.

Gross domestic product (GDP) for the fourth quarter of 2011 increased 8.9% over the same period in 2010, according to the National Bureau of Statistics. Though down down from the third quarter's 9.1% year-on-year rate, it was still stronger than the consensus expectation.

Based against the third quarter 2011, the fourth-quarter figures represent a seasonally adjusted annual growth rate of 8.2%. For

 

the whole of 2011 the annual rate of China's economic expansion slowed to 9.2%, down from 10.4% in 2010.

Further slowing in economic growth is expected this half before a pick-up towards the end of the year, but with signs of monetary easing already apparent, concern is easing that expansion will fall below the canonical 8% growth considered necessary to absorb new entrants into the labor market.

Inflation decreased in December to an annualized rate of 4.1%, a 15-month low, although the full-year figure of 5.4% was still well above the government's 4% target.

China is allowing the nation’s five biggest banks to increase first-quarter lending and weighing a plan to relax capital requirements, Bloomberg News reported on Thursday, citing "two people at state lenders".

Following the two-day National Financial Work meeting, held only once every five years to formulate plans for financial sector development, the Xinhua news agency quoted governor Zhou Xiaochuan of the People's Bank of China (PBoC) to the effect that fighting inflation is not as important today as a year ago. Food inflation nevertheless rose at an annualized rate of 9.1% in December, although November's annualized 8.8% rate had been the lowest in a year.

Growth in lending and money supply in December greatly exceeded the consensus expectation, according to data released last year, indicating an easing of monetary conditions that would help to absorb any fiscal shocks that may be propagated from Europe or North America. The M2 measure of money supply, which includes all coins and currency and demand deposits (such as checking), time-related deposits, savings deposits, and non-institutional money market, rose 13.6%, against the consensus expectation of 12.9%.

The PBoC had lowered the required reserve ratio at the end of November, increasing interbank liquidity. The bank may cut the reserve requirement again before the Lunar New Year holiday beginning January 23, Bloomberg News reported, citing Liu Li-gang, an economist with Australia and New Zealand Banking Group Ltd based in Hong Kong.

In view of the liquidity crunch that banks often face in the run-up to the holiday, which in China lasts a full week, the PBoC has already said that it will suspend debt sales and, if necessary, boost liquidity in the stock market or in financial institutions by buying securities.

In response to last week's economic figures, the bellwether Shanghai Stock Exchange Composite (SSEC) Index found footing in the high 2,100s but then resistance in the high 2,200s. The index must break into the mid-2,300s if it is to have even a chance of overcoming the medium-term downtrend channel that has taken it down from 3,050 to its present level since April 2011. It closed Wednesday at 2,266.

That is important because stock indexes are leading indicators of the general economy, as they reflect anticipations by share-buyers of corporate economic performances over the next six to nine months. Continuing weakness in Chinese equities would mean continuing lack of confidence in the country's economic performance looking forward towards the end of 2012.

Hong Kong's Heng Seng Index, which has a pattern somewhat similar to the SSEC's in the medium term, has been doing much better than Shanghai since October last year. Taiwan's TSEC stock index gained temporary support in the low 7,200s on the back of President Ma Ying-jeou's re-election as president but still needs a 21% gain before it reaches its level of just six months ago. The economies of both Hong Kong and Taiwan are deeply entwined with that of mainland China.

On the back of the economic data releases, the MSCI Asia Pacific Index for the whole region again is up over 3.3% as of Wednesday evening Tokyo time, reaching a resistance boundary, just above 118, between two post-crisis trading ranges.

Expectations of Chinese performance for the rest of the year, themselves an augury for oncoming pan-Asian economic health or sickness, will significantly influence whether the MSCI index penetrates through definitely to the upside. There is little doubt that a slowdown will continue.

For example, mainland housing starts fell 19% in December from a year earlier, and this will not be reversed soon. Because housing construction directly influences demand for cement, steel, and industrial (base) metals, the decline of this sector, representing almost 8% of GDP (including such consumer goods as furniture and kitchen appliances), will represent a significant drag on the economy,

The most recent statistical releases from Beijing have created a certain expectation among analysts that the economy's "landing" will be "soft" rather than "hard". Labor and other social unrest remains nevertheless an uncertainty in the calculation.

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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