CHINA - SLOWING DOWN?
By Ruma Dubey
The market was well on a high ride yesterday. It seemed to be moving around its own axis, creating its own set of reasons for jumping high, unmindful of other factors, macro and global factors, surrounding it. Like the Sun, it was luminescent on its own, blinding us to all other news.
In the past few days, just as there has been not-so-good news coming in from India, China too seems to be having its own set of macroeconomic issues. Based on the data of the past, it looks like the second largest economy of the world was also grappling with reality and growth issues.
Europe is China’s largest trading partner so naturally the crisis in Europe has affected China. Trade figures released yesterday, show that annual import growth of 6.3% in June was much below the estimate made by many at around 12.7%, which was also the import growth in May. MoM there has been a 640 bps fall. This clearly shows that China is also seeing a slowdown in domestic demand. On the other hand, exports for June showed a surprising growth of 11.3%, leaving an increased trade surplus of $31.7 billion against May's $18.7 billion. This rise in exports was possible on account of USA replacing Europe as the largest trading partner in first half of 2012. China's exports to the EU fell 0.8% in the first half of 2012 while that to United States rose 13.6%. But with US also not yet stable, demand remains uncertain for the months ahead.
It is time then for us to worry about China slowing down? The trade surplus does not indicate that yet but falling imports do show that domestic demand is faltering. Another indication is the rapidly declining inflation. When inflation falls much faster than expected, it’s an indicator of a probably deflation setting in. Beijing reported this week that inflation declined to 2.2% in June on a YoY. Govt debt is at an estimated 22% of GDP. More importantly, its GDP which has been at an annual average rate of 10% since 2000, fell to 8.1% in Q1 of 2012, the slowest pace since 2009. It is now expected that GDP will fall further to around 7.5% in Q2. Its GDP data for Q2 is scheduled to be announced on Friday, 13th July.
China has already sprung into action. In a surprise move last week, People's Bank of China unexpectedly cut benchmark interest rates last week for the second time in a month and it also lowered banks' required reserves ratios (RRR) in three 50 bps steps since November 2011, pushing additional liquidity of around 1.2 trillion yuan, free to now be lend. But did it need this liquidity? As such today there is more money in circulation in China than even USA and most of this money was diverted to speculative realty sector. The country may have $2.5 trillion in forex reserves but the sad truth is that debt of households and corporations amounts to 130% of GDP. Thus only monetary stimulus will not be enough.
China has stated that it has changed its tactics from being export driven to tapping more into its domestic demand. Yet, will domestic demand spike up? And to increase demand, most economists expect China to announce some stimulus package to once again spike up demand, but this time within the country itself. It is likely to redial its impetus on building roads and construction. But with the country already having the second largest road network in the world, it is unlikely that it will invest more on roads. The Chinese Govt recently approved setting up of two steel plants and several energy projects; and that will be its area of focus – giving impetus to core sectors, generating employment, encouraging investment and thus spiking demand.
We in India too need a growth stimulus and domestic demand needs to be kick started. But the big difference between India and China is that the latter is run by the Govt and it can bulldoze anything which it thinks of doing while India is run by coalition politics and everything is ruled by political parties. And that is where India could lag behind and China slowing down? It surely is but their Govt seems more than proactive to counteract the slowdown – no policy paralysis and no ‘underachievers’ there.