DISCUSSION Slowdown of China = Sustainable China?

by Yolanda Villafuerte _______16th July 2013
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China has enjoyed an incredible boom in its economy in the past few decades overtaking Japan as the second largest economy in the world. Now a vital player in the global economy, China is being watched with Argus-eyes by the rest of the world. As such, the decrease in Chinese imports and exports is unlikely to go unnoticed. Figures for the second quarter of 2013, released on the 15th of July, reported a further drop of annual growth to a 7.5%.[1] However, it is the 3.1% drop in exports, a number falling well short of analysts’ expectations of a 4% increase that has drawn recent attention to a weakening demand for Chinese goods.  Imports too have shown a 0.7% reduction from last year, signifying that the subdued demand is also domestic.

“We expect both export and import data may remain at a relatively low level in the second half, due to weak demand at home and abroad,” said Wang Jin, an analyst at Guotai Junan Securities in Shanghai.[2]

Analysts point to the economic slowdown in China’s key export markets, US and Europe, for the drag in the Chinese economy, which is heavily dependent on foreign demand and its manufacturing sector.  In response to this unexpected fall in exports, policy makers are attempting to encourage an increase in domestic consumption in order to rebalance its economy.

For its part, Beijing has indicated that it wants to take steps to boost domestic consumption. But there have been concerns that as it shifts its growth model, it is likely to see a slowdown in growth in the near term.[3]

A more controversial view has also emerged. Some analysts have speculated that the recent numbers may reflect a more accurate image of Chinese trade following a recent crackdown by Beijing on speculative capital inflows that were disguised as trade.[4] This view was further convinced by a discrepancy between official Chinese export data, which showed signs of recovery in external demand in recent months, and data from other regional countries – which showed the opposite. Chinese exporters have been thought to be overstating their shipments for some time, and this low turnout in June might just be due to the removal of such practices.

Then again, the manufacturing sector has in fact been slowing down, and it is clearly reflected in the companies and countries closely associated with Chinese business. Due to this slowdown, commodity prices have dropped and copper has hit a three-year low while mining stocks have fallen by more than 20% this year.[5]

Further, the property market is creating concern, both among domestic and foreign investors.

Gillem Tulloch of Forensic Asia told Reuters the “bubble” will burst in the second half of this year once China stops “injecting ridiculous amounts of credit into the economy.”[6]

Despite the government’s attempt to launch a three-year campaign, earlier this year, to cool down the market, home sales rose with 24% in June, according to data released by the Government on July 15th.[7] Efforts included raising down-payment and mortgage requirements, imposing a trial property tax in Shanghai and Chongqing, as well as purchase restrictions in around 40 cities. Wang Shi, Chairman of China Vanke Co. predicts that the bursting of the housing bubble will be a disaster for the real estate market and that the debt held by developers is a ‘serious problem’.[8]

It has been suggested that China will experience a much slower growth in the future, and that if handled correctly, this might not be such a bad thing.[9] Linda Yueh, Chief Business Correspondent for the BBC suggests that this could mean a more sustainable and stable economic growth for China. ‘So when growth slows in places like China, where credit has expanded too rapidly, it isn’t necessarily a bad outcome. The challenge is to manage the slowdown.[10]

President Xi Jinping recently illustrated his desire for a sustainable economic growth by refusing to deliver a rescue pack of cheap loans in the recent halt of China’s bank-to-bank lending market.

If President Xi pulls off this Herculean task, it will mean an end to the era of cheap lending, the winding down of the country’s enormous construction boom, and much slower economic growth.[11]

Although there is a current uncertainty about the Chinese market there is also a general positive attitude that the slowdown is just that, rather than an economic crisis in the making. The recently announced annual growth of 7.5% is well below the double-digit growth that China enjoyed a few years ago, however it illustrates that growth might be stabilising at a more sustainable level.[12]

The Shanghai Composite Index (SHCOMP) closed with a 0.3% gain on July 15th[13] after the real estate market continued to drop (Hangzhou Binjiang Real Estate Group Co. dropped 1.2%) after news leaked that there was a possibility that Hangzhou City would introduce a property tax trial. Adding to this was the rumour of a possible expansion of the property tax, which caused even more uncertainty in an already unstable market. Interestingly, numbers were propped up by an unexpected emerging sector – solar technology.

After China announced its plans to fivefold its installed solar capacity, technology stocks became the best performing industry group for two days running. As part of China’s 12th five-year plan, the Chinese government has shown great commitment towards developing a sustainable future through boosting technology and setting energy intensive and carbon-emission goals.[14]

China, the world’s biggest maker of solar panels, plans to add 10 gigawatts of solar power a year during the next three years, according to a statement from the State Council posted on the government’s website yesterday. The plan would increase the nation’s solar installed capacity fivefold to more than 35 gigawatts by 2015.[15]

The five-year plans are a framework for policy-making and the emphasis in the current plan put on sustainability works as an indicator for future investment opportunities in China. This was illustrated by the technology stocks, which overshadowed the decline in property development. China appears keen to shift from a ‘brown’ fossil fuel-based economy, to a ‘green’ energy-efficient one. Given that it has officially obtained the title of the world’s largest energy consumer and greenhouse gas emitter, this proves very good news for the rest of the world.[16]

Anette Bergersen is currently studying International Relations at University of Nottingham. She is interested in the development of Corporate Social Responsibility in Asia, as well as China as an increasingly influential political figure. Later this year, she plans to return to Ningbo, Zhejiang to complete her masters.

 



[1] http://www.ft.com/cms/s/0/661adf50-ecf1-11e2-a0a4-00144feabdc0.html#axzz2Z7rclZlD

[2] http://www.bbc.co.uk/news/business-23251089

[3] http://www.bbc.co.uk/news/business-23123610

[4] http://www.bbc.co.uk/news/business-23251089 WANG JIN

[5] http://www.bbc.co.uk/news/business-23043580

[6] http://business.financialpost.com/2013/03/13/chinas-property-bubble-will-burst-in-latter-half-of-2013-says-research-firm/

[7] http://www.bloomberg.com/news/2013-07-16/china-s-stock-futures-fall-signaling-declines-for-indexes.html

[8] http://www.bloomberg.com/news/2013-06-06/china-vanke-chairman-says-country-faces-risk-of-property-bubble.html

[9] http://www.bbc.co.uk/news/business-23288087

[10] http://www.bbc.co.uk/news/business-23288087

[11] http://www.bbc.co.uk/news/business-23029251

[12] http://www.ft.com/cms/s/0/153964ba-ed52-11e2-8d7c-00144feabdc0.html#axzz2Z7rclZlD

[13] http://www.bloomberg.com/news/2013-07-16/china-s-stock-futures-fall-signaling-declines-for-indexes.html

[14] http://blogs.worldwatch.org/revolt/china-unleashes-new-initiatives-in-its-push-to-secure-a-sustainable-future/

[15] http://www.bloomberg.com/news/2013-07-16/china-s-stock-futures-fall-signaling-declines-for-indexes.html

[16] http://blogs.worldwatch.org/revolt/china-unleashes-new-initiatives-in-its-push-to-secure-a-sustainable-future/

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