The bearish-on-China is going all mainstream on us. Or at least, more prominent. For example, 12 per cent of economists in a Bloomberg survey last week believe the country’s growth will fall below 5 per cent.
Well, a more convincing rebuttal to this than a Chinese State Council official comes from Standard Chartered’s chief China economist Stephen Green.
One of the key bearish themes on China is that it is caught between slowing growth and stubbornly high inflation, leaving it little room to further loosen monetary policy. Green believes that while China’s policy tools are less potent than in 2008, there is still room to move. And loosen it will, at some point in the fourth quarter.
Monetary policy is historically tight, according to the StanChart measure. And on growth Green points out that while PMIs are falling – even the official one, which remains just in positive territory – electricity production is growing:
But what about inflation? That’s easing, too, although risks remain:
We expect y/y inflation to show clearer signs of moderation in Q4. Demand has slowed, as have import prices (particularly for oil, the biggest import). There is upside risk from another sharp increase in pork prices, as a clear supply response will probably take until Q1-2012. By November-December, we expect CPI inflation to fall to the 4.5-5.0% y/y range, which will allow for some loosening.
On the local government credit problems, he is a little more circumspect:
Beijing‟s current plan for LGIV loans is to pressure local governments to ensure that interest payments are made. (If the central government wanted to embark on a significant restructuring of the economy and sort out local finances, a big, co-ordinated push to sell off local state-owned firms would be a thrilling option.) We have argued that it would be helpful to bring some of these projects onto the central government‟s books, and to finance more infrastructure through the budget rather than through the banks. Such a reform would clearly support confidence.
Real estate could be a problem for credit-constrained local governments, he acknowledges, as falling sales eventually begin to bite. But there, again, Green says there is room to move; the problems of excess inventory are mostly in the Tier 2 cities, while the Tier 3 and 4 cities are not overbuilt.
While we’re on the real estate theme, Green’s counterpart at Deutsche Bank, Jun Ma, is also expecting a landing that is not-quite-soft but far from hard. Despite having heard some alarming anecdotes from the building sector desperate to raise money overseas as domestic markets are closed to them. Ma, however, expects a real estate market correction of 10 per cent rather than, say 30 per cent – because the government will step in before prices fall even half that amount.
Anyhow — Green, as you may have guessed, is not buying the China-is-overbuilt line:
In the meantime, we believe there is still room to stimulate by increasing infrastructure investment, allowing the banks to lend, and increasing fiscal expenditure. China still has many things to build – including more infrastructure in the southern, central and western regions, irrigation projects, and social housing, among others. China‟s per-capita capital stock is likely still below 10% of the US level, while urbanisation, at 50%, has a long way to rise. China today is Japan circa 1970, not 1989.
This is the root of the debate on China, of course. Is its highly imbalanced economy at the point where much of its capital investment is uneconomic, as China sceptics such as Michael Pettis argue? Or are those reports of empty cities overblown and insignificant?
Green and co, at any rate, are calling a U-shaped recovery, rather than the V-shaped recovery prompted by the previous stimulus, with growth expected by Q2 next year.
Related links:
China: over-reliance and under-performance – FT Alphaville
If (when) China slows down - FT Alphaville
Cracks in the Chinese bubble - FT Alphaville