Economic resilience to offset turbulence

Macro indicators point to strong growth, demand pickup in China during fourth quarter, economists say

Higher retail sales and a continued investment pickup during the fourth quarter will provide enough cushion for China to ride out the economic turbulence and post solid full year growth numbers, economists say.

The prediction comes after China's economic growth slowed for the seventh straight quarter, and fell below the government target for the first time since the global financial crisis, to 7.4 percent from 7.6 percent in the second quarter. The lower numbers also sparked fears that China may not be able to achieve the government target of 7.5 percent GDP growth for the full year.

"It was the weakest quarter for China in terms of year-on-year growth," says Stephen King, global chief economist at HSBC.

According to King, GDP growth is likely to accelerate from the fourth quarter and extend well into the next year on the back of government stimulus measures. King, however, expects the acceleration to be modest and more along the lines of the numbers seen in 2009 and 2010.

"Exports continue to be in a tailspin and exporters are reeling from heavy losses, not only in China, but all over the world. It is a situation that has caught everyone by surprise and losses have come much earlier than expected," he says.

However, other indicators released alongside the GDP during the third quarter have been showing recovery signs, indicating that stimulus efforts are finally paying off.

Fixed-asset investment, a key sign of construction activity and demand for machine equipment, rose marginally to 20.5 percent during the first nine months of the year, compared with 20.1 percent during the first eight months. But the numbers are still lower than the 25 percent mark that prevailed for most of 2011.

Industrial value-added output surpassed economists' year-on-year estimate of 9 percent to 9.2 percent in September and higher than the 8.9 percent recorded in August.

Consumption continued to be on firm ground, with the nine-month retail sales posting a year-on-year growth of 14.2 percent, and higher than the 13.2 percent in August.

Positive development

Though economic growth declined in the third quarter, some economists say the government target of 7.5 percent growth for the whole year - scaled down from the earlier 8 percent target - can still be achieved and the slowdown is a good sign for China's economy in the long run.

"It's very important to note that this slowdown is potentially a positive development in the long run, as slower growth is a necessary condition for rebalancing and higher-quality growth in the economy," says Andrew Polk, resident economist of the Conference Board China Center for Economics and Business in Beijing.

"Inflation is currently subdued, but remains a concern especially if international food prices continue rising the best path forward for China is to continue slowing at a moderate pace."

John Ross, visiting professor at the Antai College of Economics and Management of the Shanghai Jiao Tong University, also expresses similar views.

"The most important economic issue is the well-being of the population and low inflation helps achieve this," he says. "This is more important than gaining a small extra GDP growth, especially the growth results in higher inflation."

Citibank analysts Shuang Ding and Minggao Shen opine that that the increase in furniture and construction material sales during the third quarter has been striking and more reflective than housing transactions during the same period.

"Overall there was a recovery in domestic demand and a reduction in external risks during the third quarter. We expect a fourth-quarter rebound," the two economists said in a recent research report.

Sun Junwei, a China economist at HSBC, says September growth indicators have exceeded all previous expectations.

"Going forward, a benign inflation outlook provides enough room for additional monetary and fiscal easing. The filtering-through of policy easing coupled with the stabilization of the property market should support a mild growth recovery in the coming months," he says.

Earlier this week, Premier Wen Jiabao indicated that after his meetings with economists, business executives and local government officials, he remained confident that China's economy had taken a turn for the better during the third quarter and given enough indications that the overall economic situation is stabilizing.

"The present policies seem to be basically correct, even though I had criticized them earlier in the year as I felt they were launched a bit too late," says Ross from Antai College. "The important thing is that the already announced investment and consumer stimulus has more than delivered."

Trade downturn

The overall trade indicators continued to suffer on the back of negative data from the US and Europe, China's largest markets.

In the US, year-on-year economic growth in the second quarter was only 2.1 percent, along with just 1.3 percent annualized quarterly growth. The numbers in Europe also did not bring any cheer.

Trade is of extreme importance to China's economy, with exports alone accounting for more than 31 percent of the total trade in 2011, says a recent World Bank report. But economists feel that this is something that will change this year and the full year numbers will rely more on domestic demand as sentiments in the US and Europe are not expected to recover until sometime into the next year.

"There will be no major acceleration in growth in either the US or Europe in early 2013 as savings and investment levels are still too low," Ross says. "Major developing economies such as India and Brazil have also slowed somewhat although they will continue to grow."

Trade increased a mere 6.2 percent in the first nine months of 2012, behind the desired target of 10 percent. The weakness in global demand has affected Chinese exporters badly with many factories bleeding from heavy losses in Europe.

Chen Yuning, president of Zhejiang GB Textile Printing and Dyeing Co Ltd, in the export-oriented coastal province of China's eastern Zhejiang, says that the business with European clients has stagnated and profit margins have been squeezed due to the sluggish economy in Europe.

"The more we are doing business with them, the more we lose, as they are cutting the prices further," he says. "So we have to depend on the domestic market, or send some workers on short leave."

The shrinking exports have also resulted in a vicious circle of falling inventories at companies, lower industrial output and even problems for lenders. But economists are still optimistic that the financing conditions have improved due to the anticipated stronger money supply growth in the next few months.

According to a recent report from Reuters, credit was slated to grow by 19.6 percent in September up from 18.8 percent in August, well above the 16.4 percent official figure for bank lending growth.

But economists caution that more tough decisions on various economic and financial reforms are needed to steer the Chinese economy out of the troubled waters.

Contact the writers at lvchang@chinadaily.com.cn and yanyiqi@chinadaily.com.cn