CHINA: A STRUCTURAL OR CYCLICAL SLOWDOWN?

THE MEANING OF CHINA’S ECONOMIC SLOWDOWN

Barry Eichengreen

The Diplomat, July 31, 2012

More than a year ago I, along with several colleagues, published a paper entitled “When Fast Growing Economies Slow Down.” In it we predicted that a significant slowdown in Chinese growth was coming. While it was not possible to be precise about the timing, we warned that the number of years for which China’s GDP would continue to grow at high single-digit rates could likely be counted on the fingers of one hand.

We got considerable pushback from critics in China and elsewhere. We had underestimated China’s enormous growth potential, these commentators warned. We failed to appreciate that the country’s growth model was unique and that it was not possible to extrapolate China’s future from the experience of other fast-growing economies.

Well, the slowdown is here.

Chinese growth in the second quarter slowed to 7.6 percent, down significantly from the double-digit norms of the past. Indeed the official figures may understate the magnitude of the change. The growth of electricity consumption has been falling even faster; at its most recent reading it has fallen to virtually zero. Unless the Chinese steel and aluminum industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt. That producer prices are falling is more evidence of weak demand.

The question is how much of this deceleration is structural, reflecting the fact that no economy can grow by ten percent per annum forever, and how much is cyclical, reflecting the weakness of the global economy. Clearly part of what we are seeing is structural. The Chinese population is aging. Labor force growth is slowing. Workers, especially in the urban centers, are demanding higher wages, which are being granted to ensure social stability and in response to pressure from foreign companies concerned with matters of image, all of which raises production costs. Other lower-cost national producers, in East Asia and elsewhere, are nipping at China’s heels. At the same time, part of the deceleration is cyclical. The tepid recovery in the United States and crisis in Europe augur poorly for Chinese exports, which were up by only 9 percent in the first half of 2012. When – it is tempting to say “if” – Europe and the U.S. begin to do better, exports and the growth of the Chinese economy should pick up again.

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CHINA: HOW TO HANDLE THE SLOWDOWN

HOW CHINA IS HANDLING THE ECONOMIC SLOWDOWN

Rediff, July 30, 2012

Even as Europe continues to go through its economic suicide and the US is stuck in political paralysis -- which could lead to the abrogation of existing tax cuts and mandatory across-the-board budget reductions at the end of the year that would dampen already anaemic growth, or even trigger recession -- China is proving that it is ready to act and do what it takes to sustain its growth.

Beijing has been quite alarmed by the steep fall in economic activity in the last few months

What was initiated as a managed deceleration of the economy to reduce inflationary pressures and deflate a real-estate bubble on the verge of getting out of control acquired, since the end of winter, a dangerous momentum because of the impact of the European crisis.
By June, China's leadership was confronted with the prospect of gross domestic product growth of between seven and 7.5 per cent for 2012, a level too close to the threshold of seven per cent growth it had determined was the minimum needed to maintain social stability.
And some economists consider that real GDP growth for this year would be even lower if the economy were left to its own course.

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DROUGHT IN INDIA

DROUGHT NOT A BIG CALAMITY IN INDIA ANYMORE

Swaminathan SA Aiyar

The Economic Times, July 29, 2012

The monsoon has failed badly this year as it did in 1965. But it's little more than an inconvenience this year, whereas in 1965 it was a monstrous calamity. The drought-proofing of India is a success story, but one widely misunderstood.

India in the 1960s was pathetically dependent on US food aid. Even in the bumper monsoon year of 1964-65, food aid totalled 7 million tonnes, over one-tenth of domestic production. Then India was hit by twin droughts in 1965 and 1966. Grain production crashed by one-fifth. Only unprecedented food aid saved India from mass starvation. Jawaharlal Nehru talked big about self-sufficiency. Yet he led India into deep dependence on foreign charity. The 1966 drought drove India into a ship-to-mouth existence. Hungry mouths could be filled only by food aid, which reached a record 10 million tonnes.

Foreign experts opined that India could never feed itself. William and Paul Paddock wrote a best-seller titled Famine 1975, arguing that the world was running out of food and would suffer global famine by 1975. They said aid-givers couldn't possibly meet the food needs of high-population countries like India. So, the limited food surpluses of the West should be conserved for countries capable of being saved. Countries incapable of being saved, like India, should be left to starve, for the greater good of humanity. Indians were angered and horrified by the book, yet it was widely applauded in the West. Environmentalist Paul Ehrlich, author of The Population Bomb, praised the Paddock brothers sky-high for having the guts to highlight a Malthusian challenge.

The US was never happy with India's non-alignment. President Johnson made Indian politicians and officials beg repeatedly for more food. This prevented mass starvation, but left Indians writhing with humiliation.

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CHINA: ¿IS A STIMULUS NEEDED?

CHINA’S ECONOMIC SLOWDOWN: WHY STIMULUS IS A BAD IDEA

What Beijing needs to spur growth is not greater spending or easy money, but fundamental reform

Michael Schuman

Time, July 26, 2012

Anyone who thought China was impervious to either the perilous state of the global recovery or the laws of basic economics should take a look at the data streaming out of the country in recent months. GDP growth in the second quarter slipped to 7.6%, the slowest clip in three years. Manufacturing output and exports have been weak and the property sector has stalled. The IMF recently lowered its forecast for China’s growth in 2012 to 8% — which would be the economy’s worst performance since 1999. And with the sagging data have come louder and louder cries for greater government stimulus to pump up growth, as Beijing’s policymakers did successfully after the 2008 financial crisis. “There’s lots more the government can do to ratchet things up,” HSBC said in a recent report.

That’s exactly what China doesn’t need, however. Government policies to greatly boost growth will only exacerbate the percolating dangers within the Chinese economy — dangers that could even result in an economic crisis. Instead, the current slowdown shows how badly China needs a new growth model, and the reform necessary to build one.

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CHINA: REVIVAL IN OVERSEAS EQUITY SALES

CHINA OVERSEAS SALES REBOUND IN JPMORGAN BANKER’S OUTLOOK

Bloomberg News

Bloomberg, July 25, 2012

Chinese companies’ overseas share sales will rebound next year as regulators root out fraud and misconduct that contributed to erasing $6.4 billion in value for mainland firms listed in the U.S., the senior investment banker in China for JPMorgan Chase & Co. (JPM) said.

There will be “a flurry of deals” once foreign investors’confidence in Chinese companies returns, Fang Fang, chief executive officer of China investment banking for New York-based JPMorgan, said in an interview in Beijing yesterday. The bank is ranked third among managers of overseas share sales by Chinese companies since the start of 2010.

“I’m hopeful that sometime in the second half, investors will come back to the table,” he said. “Investors will eventually see the value and have to do something. They can’t just sit on a pile of cash for too long.”

A revival in overseas equity sales, on track this year to raise about a third of 2010’s $61.5 billion, would bolster growth in the world’s second-largest economy. Only one Chinese company has made its U.S. trading debut in 2012, compared with about 60 in the previous three years, as short sellers such as Muddy Waters LLC said companies including Sino-Forest Corp. misstated accounts, data compiled by Bloomberg show.
“There are just a lot of companies who want to raise money,” Fang said. “We need investors to come back to the table.”

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CHINA: HSBC’S PMI

CORRECTED CHINA RESETS FOR NEXT CHAPTER

Stephen Bartholomeusz

Business Spectator, July 24, 2012

HSBC’s flash China manufacturing Purchasing Managers’ Index has provided the first tentative signs that the increasingly intense efforts by China’s authorities to arrest the slowdown in their economy may be starting to get some traction.

Coming a week before the official PMI numbers are released, the HSBC index provides an early indication of manufacturing sector conditions in China. In July the index was at a five-month high, rising from 48.2 in June to 49.5.

While an index reading of anything below 50 says the rate of growth in the sector is still falling, the latest result would suggest that the rate of that contraction has slowed significantly. HSBC’s chief economist, China, Hongbin Qu, said the result implied demand was still weak and employment was under increasing pressure.

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JAPAN-ASEAN-INDIA

POINT OF VIEW/ KEIICHIRO OIZUMI: JAPAN CAN INCREASE PRESENCE IN INDIA VIA ASEAN

Keiichiro Oizumi

The Asahi Shimbun, July 23, 2012

As India’s domestic market grows, its imports have increased rapidly.

To secure a position in the Indian market, exports from production bases in members of the Association of Southeast Asian Nations are vitally important in addition to export promotions from Japan and investment in India.

India’s real GDP growth rate has been on a downward trend since peaking at 8.3 percent in the October-December period from the same quarter the previous year.

Nevertheless, the economy was able to maintain a high 7.1 percent year-on-year growth in 2011.

For the five years through 2012, India’s economic growth rate has been a high 8.1 percent on average, and the International Monetary Fund projects that an average annual growth of around 8 percent will be maintained over the next five years.

At $1,457, per capita GDP is low, but India’s markets have changed significantly, in terms of size and substance, in the wake of high economic growth.

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