China’s economy isn’t veering off the tracks and heading for the “hard landing”, as so many US and European analysts and hedge fund managers dream. In fact, last week’s monthly and quarterly flood of data on the Chinese economy contained enough evidence to remain confident that it is in the midst of a soft landing, which is good news for Australia and the federal budget.
Much of the commentary claimed China’s second-quarter growth rate of an annual 7.6% wasn’t convincing, nor was the sharp slowdown in the inflation rate to well under 3%, or another big trade surplus resulting from weak growth in exports and even weaker growth in imports. There were comments that deflation could rear its ugly head, that the slowdown was steeper than expected and that the economy would worsen into 2013. For many of these critics, China is still the next big bubble. But, while there’s a lot in the data from China to be worried about, there’s a lot less than we are now seeing from the US, Europe, Canada, Brazil, India and others. The eurozone crisis and the sluggish US economy (and its unresolved spending and deficit problems) remain the biggest sources of tension for the global economy in the next six months.
The Chinese economy grew 1.8% in the June quarter from March when it grew 1.6% (revised down from the first reported 1.8%) from the December quarter. Annualised, the six-month growth rate is about 6.8% to 7%, weak by recent Chinese standards and the 8.2% rate for all of 2011, for example. But compare that quarter on quarter growth with the current annual growth rate in the US of 1.9% (stunning isn’t it?), a negative 0.3% to 0.4% in the UK and the recession in Europe (but with Germany still seeing moderate growth of 2% annual, if its lucky). India is slowing, Brazil is stagnant, as is Russia; South Korea last week cut interest rates and the smaller Singapore economy contracted by about 1% in the June quarter.
So China stands out and is supporting global growth on its own, but the slowdown this year will see the IMF trim its 2012 forecast for the world to about 3.2% next week from 3.5% forecast in April. But, despite the gloom in many commentaries over the weekend, there’s still enough evidence in the data to be optimistic. Former Morgan Stanley Asia executive chairman Stephen Roach thinks much of the pessimism about China is wrong, as he told the CNBC network in the US on Friday. “Beware of people who say things like this,” he said on CNBC’s Fast Money Halftime Report. “Often times they’re just talking their own book.”
“Urbanisation in China is happening at a pace that the world has never seen before. Currently, China is moving 15-20 million people from the countryside into the city and to do that they need to build a huge amount of low- and middle-income shelter and that is an ongoing feature of the Chinese economy. The state planning agency has approved lots of new projects — the rate of approval has picked up materially, and that’s the tool that really works (to drive the economy),” said Roach. “In 2009 when they had exports collapse, they put the pedal to the metal on the investment side,” he says, And by 2010 China had bypassed Japan as the world’s second largest economy. China has a huge pipeline of unmet investment needs given the urbanisation needs of their economy. It’s what they did (to drive the economy) three years ago and I’m convinced they’ll do it again.”
That’s backed up by data released By China’s Ministry of Finance on Friday, which showed annual growth in China’s fiscal spending jumped to 17.7% in June from 10.8% in May as the government stepped up efforts to bolster the slowing economy. Spending of 1.27 trillion yuan ($A198 billion) in June consisted of 1.085 trillion yuan by local governments and 187.3 billion yuan by the central government. And spending on transportation was up more than 44% June year-on-year, while spending on the resource exploration and power sectors rose 22.1%, while spending on housing jumped 36.4%.
And looking at the data on production and key imports, its clear that while the pace of activity has clearly slowed, China hasn’t got the wobbles. China’s industrial production rose an annual 9.5% in June, down a touch from the 9.6% rate in may, but 0.75% higher on a month on month comparison.
Retail sales increased 14.4% from the June quarter of last year, down from the 14.8% in the first quarter. Fixed-asset investment, one of the principal drivers of China’s economy, grew 20.4% year-on-year in the three months to June, down 0.5 percentage from first quarter, and 5.2 percentage points lower than the second quarter of last year.
And, China’s new yuan-denominated loans surged in June as the government moved to buoy the slowing economy. June’s new yuan-denominated loans rose by 285.9 billion yuan (about $US45 billion) year on year to 919.8 billion yuan. That was a three-month high after reaching 1.01 trillion yuan in March. That’s sure sign the government is serious about preventing a hard landing for the economy.
China’s crude steel output rose 0.6% to 60.21 million tonnes in June from June of 2011, but was down from May’s 61.2 million tonnes. Imports of iron ore in June were 58.3 million tonnes, down 9%, but up in June of 2011. Iron ore imports over the first half of this year showed stable growth, rising 10% from the same period last year. China’s crude steel output is on track to top the 700 million tonne mark this year from 683 million tonnes in 2011. That’s all good news for Australia and our iron ore exporters, such as BHP Billiton and Rio Tinto.
China’s imports of coal have also been strong this year. In the first half of the year China’s coal imports were 140 million tonnes, up 66% from the same period last year. So much for that talk from the likes of Ross Garnaut last week that China would be cutting its coal imports.
Copper imports jumped again, but month-to-month movements should be ignored because many analysts believe they are linked to financing deals with Chinese banks and companies and have nothing to do with the real level of demand for copper in China. In fact if there’s be a crack in the Chinese economy the early signs of fracture could appear in and around copper imports and consumption data.
June crude oil imports fell from a month earlier to 21.7 million tonnes, or 5.3 million barrels per day, 12% down from May’s daily rate. Production of oil was down in June as the country struggles to meet demand for domestic crude. Electricity output was flat on June of last year, a situation that puzzles Western analysts who reckon it should have been higher if the economy grew 1.8% in the quarter from a year earlier and industrial production was up 9.5% from a year earlier. But the Chinese government says the lack of growth resulted from measures from business to cut greenhouse emissions and to step up energy consumption measures. The jury is well and truly out on that one.