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China sees rebound in the making as reforms go on
By Ding Shuang |
June 28, 2012, Thursday
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Print Edition
Print Edition
WE expect a growth rebound in China in the second half with sustained policy easing. Economic growth appears to have stabilized, although at a low level. Second-quarter growth may fall to 7.3 percent year on year in the absence of a strong lift from June.
Meanwhile, inflation is likely to stay below 3 percent in the next few months, creating room for further policy easing.
We expect the Chinese government to fully utilize this room under the current policy mix, which would facilitate a growth rebound in the third quarter.
We trim our 2012 annual economic growth forecast to 7.8 percent from 8.1 percent to reflect anemic domestic activity in the second quarter and further weakening of European demand.
Unless the sovereign debt problem in Europe escalates to a full-blown economic and financial crisis and results in a deep recession in the continent, we think the Chinese government does not have the appetite to introduce a 2008-09 type of stimulus. The negative fallout from the last stimulus - such as local-government financing vehicle debt and property bubble - still lingers.
Instead, we expect two more interest rate cuts to boost demand; two more reserve requirement ratio cuts to bring money growth to 14 percent; expansionary fiscal policy within the limit of the budget; and targeted property policy easing to prevent an investment slump.
The current government has surprised the market by introducing reforms, including steps toward exchange rate and interest rate liberalization, in the last year of its tenure.
The need for reform appears to have been recognized by the hopefuls of the new leadership.
In making forecasts for 2013 and beyond, we assume the new government would tolerate slower growth for better quality, introduce reforms to correct cost distortions, and deregulate investment to encourage private-sector involvement.
Inflationary pressure
Cost normalization may increase inflationary pressures. To contain inflation, the new government may accept lower-than-potential growth.
As a result, China's economy may not grow at full capacity in the near future. We expect growth to rebound slightly in 2013 to 7.9 percent benefiting from the spillover from 2012's policy easing, while medium-term growth may approach 7 percent.
The correction of over-investment and government policies to boost consumption will likely slow investment more than consumption, causing investment-to-GDP ratio to decline as early as 2013-2014.
An escalation of European debt crisis may cause hard landing. In a simplistic scenario where a full-blown debt crisis deepens the euro area's recession to -2 percent, weaker external demand - including spillover to China's other trading partners - may further erode China's growth by nearly one percentage point. This could trigger a second-round effect on domestic demand due to higher unemployment in export-oriented industries, resulting in growth below 7 percent in the absence of additional policy support.
The article was based on a Citigroup's report on China's economy dated June 22. The opinions expressed are his own.
Meanwhile, inflation is likely to stay below 3 percent in the next few months, creating room for further policy easing.
We expect the Chinese government to fully utilize this room under the current policy mix, which would facilitate a growth rebound in the third quarter.
We trim our 2012 annual economic growth forecast to 7.8 percent from 8.1 percent to reflect anemic domestic activity in the second quarter and further weakening of European demand.
Unless the sovereign debt problem in Europe escalates to a full-blown economic and financial crisis and results in a deep recession in the continent, we think the Chinese government does not have the appetite to introduce a 2008-09 type of stimulus. The negative fallout from the last stimulus - such as local-government financing vehicle debt and property bubble - still lingers.
Instead, we expect two more interest rate cuts to boost demand; two more reserve requirement ratio cuts to bring money growth to 14 percent; expansionary fiscal policy within the limit of the budget; and targeted property policy easing to prevent an investment slump.
The current government has surprised the market by introducing reforms, including steps toward exchange rate and interest rate liberalization, in the last year of its tenure.
The need for reform appears to have been recognized by the hopefuls of the new leadership.
In making forecasts for 2013 and beyond, we assume the new government would tolerate slower growth for better quality, introduce reforms to correct cost distortions, and deregulate investment to encourage private-sector involvement.
Inflationary pressure
Cost normalization may increase inflationary pressures. To contain inflation, the new government may accept lower-than-potential growth.
As a result, China's economy may not grow at full capacity in the near future. We expect growth to rebound slightly in 2013 to 7.9 percent benefiting from the spillover from 2012's policy easing, while medium-term growth may approach 7 percent.
The correction of over-investment and government policies to boost consumption will likely slow investment more than consumption, causing investment-to-GDP ratio to decline as early as 2013-2014.
An escalation of European debt crisis may cause hard landing. In a simplistic scenario where a full-blown debt crisis deepens the euro area's recession to -2 percent, weaker external demand - including spillover to China's other trading partners - may further erode China's growth by nearly one percentage point. This could trigger a second-round effect on domestic demand due to higher unemployment in export-oriented industries, resulting in growth below 7 percent in the absence of additional policy support.
The article was based on a Citigroup's report on China's economy dated June 22. The opinions expressed are his own.
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