Real GDP growth likely to still be in the 9 per cent range
While the Chinese economy is likely to see its real GDP growth moderate in 2011, it will be fiscal austerity in the west and not a plunge in Chinese economic output that will be the big drag on the global economy next year, finds a new report from CIBC World Markets Inc.
“Some of the developments in China that are viewed as harbingers of trouble ahead are in fact indicative of rising economic confidence both among the public and government officials,” says Avery Shenfeld, Chief Economist at CIBC. “The move to tighten monetary policy, as well as the recent decision to allow the yuan to gradually appreciate against the greenback, are both just reversals of policies put in place when the global slowdown first hit China in 2008.
“China’s economy isn’t immune to global forces. It will feel the impact of a deceleration in global growth next year, but not be its cause. At this point the incoming news suggests that China is going through an economic rebalancing, with a tolerable degree of policy-induced moderation to nine per cent growth in 2011 (down from 12 per cent in the last four quarters). It’s the west, where fiscal austerity will hit hardest, where the real growth risks lie.”
The report found that the spike in China’s lending growth last year was part of a deliberate effort by Beijing to boost property development and business investment as the country’s large export sector was hit hard by plunging global demand. It also notes that the Chinese government clearly believes the worst of the global recession and its attendant financial crisis is over, and recent increases in reserve requirements are simply aimed at reversing that process now that global trade volumes have finally improved.
Mr. Shenfeld believes that much of the concern over the health of the Chinese economy has been overstated. “Chinese equities have tanked over the past few months, but we’ve seen as much as a 50 per cent correction in the 2001-05 period without any visible deceleration in GDP. Furthermore, based on past performance, investors appear to be inured to such changes of fortune given how frequently they take place in what is increasingly becoming a casino-like market.”
He also thinks concerns about the economic consequences of an overheated housing market are overblown. “On a national basis, there appears to be no evidence that the average Chinese family is facing a squeeze on spending power from higher house prices or rents, as incomes have fully kept pace with rising residence costs.”
Beijing has taken aim at speculative demand for housing by raising the spread on mortgages, lifting minimum down payments, and eliminating borrowing for anything beyond two residences. These property-specific measures are a clear negative for the sector, but should act as a substitute for more aggressive rate hikes that would have a much wider impact on growth.
“Even with those policy moves, China will likely take further steps to slow broader lending aggregates, reversing the all-out growth in money supply associated with last year’s policy ease,” adds Mr. Shenfeld. “However, we don’t view Beijing as likely to be turning the screws so tightly as to severely choke off forward economic momentum. For one, while headline inflation has accelerated, most of the momentum is narrowly concentrated in food. In addition, even a five per cent strengthening of the yuan will provide a bit of cushion against high inflation, particularly since the Chinese currency has already seen a sharp gain against major non-U.S. currencies like the euro.”
One part of the economy that Mr. Shenfeld doesn’t expect to slowdown for some time is the rapidly growing industrial and transportation infrastructure sector. He notes that near double-digit growth in China isn’t driven by just exports, but the build up of power plants, rail lines and other facilities necessary for a modern economy to function. Despite very rapid industrialization over the last 20 years, China still has miles to go. To take just one measure, Chinese power consumption is still light-years away from where it is on a per-capita basis in the major western economies, or other East Asian success stories such as South Korea. China’s overall capital-to-labour ratio is also still a mere fraction of more developed economies.
The report also notes that while some Chinese wages have increased by as much as 20 per cent this year, this comes on the heels of minimum-wage freezes and downward pressure of wages during the global recession. The gap between urban and rural pay is now at an all time high giving workers plenty of incentive to move into the coastal factory heartland. However, with this gradual increase in wages over the last decade, low-skill and low-tech sectors like toys and clothing have been shifting to the few jurisdictions with even cheaper wages like Bangladesh and Vietnam.
As a result, high tech goods have more than doubled their share of China’s exports since 1995. China is also shifting its trade orientation geographically, with other Asian economies becoming more important target markets.
“As wages rise, and the Chinese yuan appreciates, household consumption and service sectors can begin to assume a larger role in driving growth forward,” adds Mr. Shenfeld. “That process is now underway, with consumption growth firming since 2008. More needs to be done, including the establishment of a social safety net that reduces the need for precautionary savings.
“But confidence among Chinese households that their recent income gains are here to stay is already changing consumer behaviour. In that regard, China is following the well-trodden development path of other East Asian economies such as Japan, Taiwan and Korea.”
The complete CIBC World Markets Inc. report is available at: http://research.cibcwm.com/economic_public/download/sjun10.pdf.
CIBC World Markets Inc. is the corporate and investment banking arm of CIBC. To deliver on our mandate as a premier client-focused and Canadian-based wholesale bank, we provide a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.
For further information: please contact Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, [email protected]; or Kevin Dove, Communications and Public Affairs at 416-980-8835, [email protected]