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China's current slowdown not yet comparable with late 2008
By Fitch Ratings |
June 26, 2012, Tuesday
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Print Edition
Print Edition
THE current economic slowdown in China, illustrated by the fall in the HSBC Flash PMI index to its lowest level this year, is not comparable with the much sharper slowdown of late 2008, and is likely to lead to a milder policy response than that was enacted in 2009.
A widely watched indicator of the prospects for the Chinese economy, the HSBC Flash PMI index fell to 48.1 in June, from 48.4 in May, the bank said on June 21. A reading under 50 means contraction.
The most recent reading above 50 was in July last year. But the decline is not as severe as that in 2008, when the index went from 53.3 to 41.8 between July and November in response to the global financial crisis. Qu Hongbin, chief economist for China at HSBC, said despite the contraction, the pace of the slowdown seems to be moderating.
We already anticipate a slowdown in Chinese growth. Our forecast for Chinese real Gross Domestic Product growth in 2012 remains 8.0 percent, below the 2007-2011 average of 10.5 percent per year.
We revised up our forecast for 2013 to 8.2 percent, from 8.0 percent, in expectation of a modest policy stimulus in the second half of this year.
No aggressive move
We do not anticipate as aggressive a response to the current slowdown as that in 2009, which initiated a rapid expansion of the amount of debt in the Chinese economy.
The pressure for this debt to move on to the sovereign balance sheet is reflected the Negative Outlook on our "AA-" Local-Currency Issuer Default Rating (IDR).
This is partly because the labor market in China is stronger than it was in 2009, and partly because we expect the Chinese authorities to be mindful of the risks associated with a further rapid expansion of credit. Policy will be eased only gradually to avoid stoking inflation and house prices. Nevertheless, we do expect stimulus to be deployed to head off a spill-over from the global economy into domestic demand.
There is some room for both fiscal and monetary stimulus. A sharp fall in inflation, to 3 percent year on year in May from a peak of 6.5 percent last July, preceded the People's Bank of China's 25-basis-point policy rate cut earlier this month. Meanwhile, our projected budget deficit of 1.1 percent of GDP this year leaves scope for further fiscal stimulus. This policy flexibility is one reason why we think China has the potential to avoid an economic "hard landing" although this remains a possibility.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. Shanghai Daily edited the story. The original article can be accessed at www.fitchratings.com. All opinions are those of Fitch Ratings.
A widely watched indicator of the prospects for the Chinese economy, the HSBC Flash PMI index fell to 48.1 in June, from 48.4 in May, the bank said on June 21. A reading under 50 means contraction.
The most recent reading above 50 was in July last year. But the decline is not as severe as that in 2008, when the index went from 53.3 to 41.8 between July and November in response to the global financial crisis. Qu Hongbin, chief economist for China at HSBC, said despite the contraction, the pace of the slowdown seems to be moderating.
We already anticipate a slowdown in Chinese growth. Our forecast for Chinese real Gross Domestic Product growth in 2012 remains 8.0 percent, below the 2007-2011 average of 10.5 percent per year.
We revised up our forecast for 2013 to 8.2 percent, from 8.0 percent, in expectation of a modest policy stimulus in the second half of this year.
No aggressive move
We do not anticipate as aggressive a response to the current slowdown as that in 2009, which initiated a rapid expansion of the amount of debt in the Chinese economy.
The pressure for this debt to move on to the sovereign balance sheet is reflected the Negative Outlook on our "AA-" Local-Currency Issuer Default Rating (IDR).
This is partly because the labor market in China is stronger than it was in 2009, and partly because we expect the Chinese authorities to be mindful of the risks associated with a further rapid expansion of credit. Policy will be eased only gradually to avoid stoking inflation and house prices. Nevertheless, we do expect stimulus to be deployed to head off a spill-over from the global economy into domestic demand.
There is some room for both fiscal and monetary stimulus. A sharp fall in inflation, to 3 percent year on year in May from a peak of 6.5 percent last July, preceded the People's Bank of China's 25-basis-point policy rate cut earlier this month. Meanwhile, our projected budget deficit of 1.1 percent of GDP this year leaves scope for further fiscal stimulus. This policy flexibility is one reason why we think China has the potential to avoid an economic "hard landing" although this remains a possibility.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. Shanghai Daily edited the story. The original article can be accessed at www.fitchratings.com. All opinions are those of Fitch Ratings.
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