Zuo Xiaolei, chief economist at China Galaxy Securities in Beijing, says there are several emerging challenges for the mainland economy, but believes none will threaten its growth, at least for now.
Speaking at AsianInvestor’s third annual China Institutional Investor Forum, recently held at the Regent Hotel in Beijing, Zuo reassured the audience of institutional investors, banks, brokers and fund managers that there won’t be a Chinese ‘double dip’, even if the West falls into one.
This summer, many observers in China have predicted a ‘soft landing’ for the Chinese economy, in which GDP growth rates fall below 8%. This reflected a reduction in money supply (as measured by M2, which usually means all types of cash and deposits except for money-market funds). Over the course of May and June, M2 in China fell from 20% to 17%.
This stoked concerns that China’s easy-money policies of 2009 were ending. A slowdown in imports and a rise in inventories added to worries, and led some economists to question the power of domestic consumption.
Indeed, Zuo says most economists agree that the Chinese economy slowed as much as 1.8% in the second quarter, and this deceleration may continue through the year.
What would constitute a Chinese double-dip? Obviously the term is not used in its technical, literal sense (unlike in the US). But a return to the 6.1% quarterly GDP growth experienced in the first quarter of 2009 would definitely constitute a damaging slowdown.
The fiscal stimulus package of 2009 (mainly via bank loans to local government vehicles) boosted GDP growth up to 10.1% by the fourth quarter. It hasn’t run out of steam, however. Zuo notes 2010 Q3 GDP growth should clock 10.3%, after peaking at the start of the year at around 11%.
Zuo says such modest fluctuations are not a big deal. What is changing is the government’s policy focus, which began the year focused on combating inflation. The government has raised banks’ reserve requirements, closed factories, and tightened rules on real-estate investing, in order to moderate economic expansion. These measures explain the decline in M2.
Fears of a real-estate collapse are overblown, she says, partly because the government has already prevented the economy from overheating. The long-term urbanisation trend will continue to support property prices in the cities for a long time.
And while industrial output may have declined, the services sector is booming. Important official bodies such as the National Development and Reform Commission continue to aim for annualised GDP growth rates of 9.5-10%, and recognise that levels beyond this lead to misallocation of capital.
Similarly, Zuo cites NDRC statements on inflation as being benign. Although consumer price inflation rose to 3.3% this summer, much is explained by food prices, and one-off salary hikes in coastal manufacturing plants. The government has levers to ensure inflation never goes as high as 5%, she says.
Zuo concludes that the government’s goal is steady growth, with inflation expectations kept under control. It has contained the risks from its fiscal stimulus programme. It will continue to support sectors such as alternative energy, consumption and developing the interior. She doubts the government will need to raise interest rates this quarter, and any such measure would be counterproductive, as it would only attract ‘hot’ foreign capital.
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