By Tim Condon
ING senior economist'
Sacrificing growth this year for larger objectives sets the stage for incoming political leaders to ease policies in 2013. Strong growth will make them look like heroes.
We think China will experience a hard landing this year. The hard vs. soft landing debate intensified following the release of second quarter GDP data showing growth had slowed to 7.6 percent from 8.1 percent in the first quarter.
The conventional thinking, which we shared, was that sub-8 percent growth would set off alarm bells in Beijing. The authorities would aggressively ease financial policy and growth would be back above-8 percent in the third quarter.
The lack of aggressive stimulus prompted our shift from the soft-landing camp to the hard-landing camp. In retrospect, we think we missed the message from Premier Wen Jiabao’s downgrade of the official growth forecast to 7 percent in March.
For many years the forecast had been 8 percent and the economy had grown at double-digit rates. We interpreted PM Wen’s downgrade as signalling that the years of double-digit growth were over, an uncontroversial proposition.
We now believe that what PM Wen meant was that 2012 was going to be a year of consolidation and the authorities were prepared to tolerate a significant growth slowdown. Growth was 7.9 percent in the first half of the year so it would have to slow to 6.1 percent in the second half to produce 7 percent full year growth.
There is no evidence in the high frequency data that growth has slowed so sharply.
Nor does ING’s growth forecast for the advanced economies, a main driver of China’s export outlook, warrant such an assumption. While full-year growth of 7 percent seems unlikely, 7 percent growth in the third and fourth quarters of 2012 now is our baseline scenario.
It isn’t that the authorities haven’t eased.
Monetary policy has become more accommodative. Since December the monetary authorities at the People’s Bank have cut the required reserve ratio or RRR three times by a cumulative 150 basis points (bp) to 20 percent. They also cut the policy interest rates — the one-year lending and deposit rates — twice, in June and in July, by a cumulative 50bp.
However, to analysts like us, conditioned by the dramatic policy response to the global financial crisis, the easing measures appear small. Context matters and there is a vast difference between then and now. The earlier context was an unprecedented external demand shock. Today the context is the need to clean up the excesses from the 2008 stimulus.
Among these is property price inflation. While the authorities moved forcefully in April 2010 to curb it PM Wen has said repeatedly that there is no scope for relaxing until house prices fall to a “reasonable” level. We do not expect any softening of the housing measures as long as PM Wen remains in office, which takes housing, arguably the most direct way of boosting spending, off the menu of policy options this year.
Infrastructure spending was a major beneficiary of the earlier stimulus, much of it financed by bank lending to local government investment vehicles. The unintended consequences of this are legion.
They include a host of corruption scandals — for example, the railways minister was sacked and expelled from the party over corruption charges, poor quality construction, collapsed bridges, accidents involving high-speed trains and stretched local government finances to name but a few.
We think that the authorities are sufficiently alarmed by these problems to want to avoid a repeat, which a significant monetary easing would risk.
The experience with the 2009-10 monetary stimulus demonstrated that command and control policies permitted China’s policymakers to act forcefully in a crisis.
They were justly lauded for “saving the world” during the global financial crisis.
The contrast with the United States, which experienced the deepest recession since the Great Depression, seemed a triumph of China’s mixed economy model over the market economy model.
The hopeful interpretation of 2012 is that China’s policymakers don’t see it that way.
If we’re correct that the outgoing administration of PM Wen wants to make progress in cleaning up the excesses from the earlier monetary stimulus before the transfer of power to his putative successor, Li Keqiang, the message for pro-market reforms is positive.
We view measures like increasing banks’ flexibility to set interest rates, opening the capital account and increasing two-way renminbi risk as support for the positive view.
If our 7.5 percent forecast is correct GDP growth this year will be the lowest since 1990 when the economy was reeling from the Tiananmen shock. Unlike in 1990, in 2012 the authorities are deliberately sacrificing growth for a larger objective.
We think the sacrifice sets the stage for the incoming administration to ease more aggressively and we forecast growth bouncing to 9 percent in 2013. Incoming PM Li will look like a hero.