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China’s economic direction: feeling the stones
Anybody who hoped that the economic figures from China for January would provide a clear roadmap for 2012, or settle the ‘hard’ versus ‘soft’ landing debate, has been disappointed. In part this is because of the distorting effect of the Chinese New Year, which fell unusually early at the end of last month. Comparisons with 2011 will be difficult for February too, as the holiday was in that month last year. But other factors are at work that only underline the uncertainties underlying the outlook for the world’s second-largest economy in this year of transition.
The January data showed exports and imports both falling for the first time in two years, the former by 0.5 per cent and the latter by 15.3 per cent year on year. New lending was lower than expected: its January figure was the lowest for five years. Money supply expanded at a similarly restrained rate (12.4 per cent for M2). Instead of dropping in line with the trend in late 2011 inflation rose to 4.5 per cent. The Purchasing Manager's Index (PMI) has also improved, edgig back above the watershed 50 point mark.
What to make of all this?
Caution and control
Clearly there are storm clouds on the trade front, as we signalled in our report on the outlook for 2012 and repeated in our blog on the “Year of Many Dragons”. Chen Deming, the commerce minister, noted that last month’s numbers “cannot make us optimistic” and the IMF warned that deteriorating conditions in Europe could cut China’s expansion rate by almost half this year. But the monthly trade surplus widened to US$27.3 billion, a six-month high, and Chinese New Year took out four working days compared to January 2011. Allowing for that, the export figures hold up much better. While imports slumped, China bought more crude oil and copper last month than a year earlier and the fall has to be seen in the context of the rebuilding of stockpiles in late 2011 – iron ore inventory at ports was near a record at the end of last year.
The 4.5 per cent CPI figure can be attributed to the New Year, and we expect it to resume its decline in February. The slow pace of new bank loans, which amounted to 738.1 billion yuan (US$117 billion), was up from 640.5 billion yuan in December. It can be seen as a welcome exercise of control and caution by the authorities, who embarked on a prudent easing policy last autumn. As expected the reserve ratio requirement for banks has been cut by 50 basis points to 20.5 per cent injecting Rmb400 billion ($63.5bn) into the banking system. But, as in other areas, the central government wants to be sure that it has its hands on the levers and can avoid a runaway credit boom on the lines of 2009. Putting the tiger back in the cage is much more difficult than releasing it, as Premier Wen Jiabao has said. Having gone a good deal of the way through micro-management of loan books and audits of local governments, Beijing is not going to give up the game now even if the first quarter brings some nasty growth numbers and a fall in steel demand as property sales remain low, hitting iron ore prices. The same quest for control applies to the property sector, where we expect controls to remain in force until the middle of the year in order to produce a market that rewards investors but is accessible to first-time buyers.
Long and winding road
Caution on the inflation front was shown today by a statement from the central bank stressing the need to ensure a downward trend in view of upward pressure from loose global liquidity and commodity prices. The PBoC said it would use a mix of policy tools to maintain reasonable credit growth while keeping a lid on inflation. “Our policies will become more targeted, flexible and pre-emptive, and we will make timely and appropriate fine-tuning to keep prices basically stable as well as fast economic growth,” it added. It expects M2 money supply to grow by 14 per cent this year. Though no figure has been announced, we expect bank loan growth to run at Rmb8 trillion (US$1.3 trillion) this year, between Rmb500 billion and 1 trillion (US79 to 158 billion) up on 2011, depending on which measure is applied to last year.
When will the tipping point come at which easing takes precedence? My colleague Bo Zhuang believes this will probably be after bad numbers for industrial production in March that will be seen as justifying serious easing. If consumers show the caution evident at the Chinese New Year (see last week’s e-note by Fergus Naughton), the pressure to encourage more spending will grow. But this is not an either-or matter, with many contingent factors coming into play. The real issue may be the velocity of the slowdown: if it seems to point to 7 per cent before the Communist Party Congress in October, the accelerator will be pressed. With the extent of the impact on China’s economy of the European downturn unknown and so many domestic balls in the air, the truth is that policymakers in Beijing are watching and waiting before acting, as shown by the monetary caution in January. They know where they want to get to in the end – a rebalanced, sustainable, domestically driven economy – but not even the cleverest mandarins in the leadership compound in Beijing can know the exact nature of the road ahead.
Deng Xiaoping may not have actually come up with the celebrated phrase attributed to him about crossing the river by feeling the stones, but it seems quite in order three decades after he set China on its current course.