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China sees U-shaped recovery amid capacity reduction
By Ma Jun |
October 25, 2012, Thursday
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WE believe that the trajectory of China's economic recovery this time around will be similar to the 3-year U-shaped recovery in 1998-2001, but the duration of the adjustment period will likely be shorter for a few reasons.
First, the demand shock (and over-capacity) in 2012 is less serious than in the 1998 period. Second, state-owned enterprises, which produced 41 percent of total industrial output in 1997, accounted for only 27 percent of total industrial output in recent years. Given that private firms are much more flexible in achieving "capacity reduction" (including via shutting down companies and laying off workers) than SOEs, the "adjustment (or de-investment)" process this time will also likely be a quicker one.
Given that the capital expenditure growth of about 2,000 A-share listed companies has decelerated sharply to only 7 percent in the first half of this year down from the 25 percent peak about one and half years ago, we believe the adjustment process started already from the beginning of this year.
Therefore, we are likely to see another nine months of "adjustment" (i.e., below trend growth) before GDP growth returns to its potential rate of about 8.5 percent in the second half of 2013.
In the coming nine months, many firms will still need to "deinvest," or to slow their investment growth and cut capex in order to reduce overcapacity. At the end of this process, capacity utilization rates should return to normal, and companies will begin to accelerate their investment and will drive the recovery of the economy.
Those who do not agree with our U-shaped growth outlook belong to two schools: the very bearish school (believers of an L-shaped growth trajectory - no recovery due to the "structural nature" of the slowdown), and the super bullish school (believers of a V-shaped recovery, driven by a significant policy stimulus, as seen in 2009). As we have argued in several of our recent notes, we believe China's recent economic deceleration is mainly cyclical in nature, rather than driven by the structural decline in labor competitiveness and demand for infrastructure spending.
Therefore, we believe a recovery will ensue instead of an L-shaped trajectory. Also, as we pointed out many times, the government is unlikely to introduce a very large policy stimulus this time around and thus a V-shaped recovery is a remote possibility.
The article was adapted from a Deutsche Bank research report dated October 19. The opinions expressed are his own.
First, the demand shock (and over-capacity) in 2012 is less serious than in the 1998 period. Second, state-owned enterprises, which produced 41 percent of total industrial output in 1997, accounted for only 27 percent of total industrial output in recent years. Given that private firms are much more flexible in achieving "capacity reduction" (including via shutting down companies and laying off workers) than SOEs, the "adjustment (or de-investment)" process this time will also likely be a quicker one.
Given that the capital expenditure growth of about 2,000 A-share listed companies has decelerated sharply to only 7 percent in the first half of this year down from the 25 percent peak about one and half years ago, we believe the adjustment process started already from the beginning of this year.
Therefore, we are likely to see another nine months of "adjustment" (i.e., below trend growth) before GDP growth returns to its potential rate of about 8.5 percent in the second half of 2013.
In the coming nine months, many firms will still need to "deinvest," or to slow their investment growth and cut capex in order to reduce overcapacity. At the end of this process, capacity utilization rates should return to normal, and companies will begin to accelerate their investment and will drive the recovery of the economy.
Those who do not agree with our U-shaped growth outlook belong to two schools: the very bearish school (believers of an L-shaped growth trajectory - no recovery due to the "structural nature" of the slowdown), and the super bullish school (believers of a V-shaped recovery, driven by a significant policy stimulus, as seen in 2009). As we have argued in several of our recent notes, we believe China's recent economic deceleration is mainly cyclical in nature, rather than driven by the structural decline in labor competitiveness and demand for infrastructure spending.
Therefore, we believe a recovery will ensue instead of an L-shaped trajectory. Also, as we pointed out many times, the government is unlikely to introduce a very large policy stimulus this time around and thus a V-shaped recovery is a remote possibility.
The article was adapted from a Deutsche Bank research report dated October 19. The opinions expressed are his own.
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