What Does China's Slowing Growth Rate Mean for Future Policy Settings?

By Sun Jianfang
Published: 2010-08-12

News, page 7
Original article:

The decline in China's manufacturing purchasing managers index (PMI), an indicator of economic activity, over the past three months indicates that the country's economic growth rate is slowing.

According to the China Federation of Logistics and Purchasing (CFLP), compared with June's PMI, the PMI in July dropped 0.9 percentage points to 51.2, the lowest level in the past 17 months.

HSBC also publishes PMI data, their seasonally adjusted figures for July showed that the PMI was down to 49.4 from June's 50.4. This is the first time that the indicator dropped below 50 points since March 2009.

"China's PMI dropping below 50 for the first time in 16 months indicates that, due to the combined effects of tightened real estate lending and also the elimination of outdated (high polluting and energy-intensive) facilities used in industrial production, the annual growth rate of the manufacturing industry has dropped compared with that of the previous month" Qu Hongbin, HSBC's chief China economist, explained to the EO.

Wang Tao, chief China economist at UBS said that the rate of growth in investment, industrial output and even exports are expected to decline. In addition, the impact of tightened real estate lending would likely lead to a weakening of demand for heavy industrial products and construction materials.

Zhu Jianfang, chief economist at CITIC Securities, also argued that if policies are not adjusted soon, the rate of investment growth in China will slow.

No Need for Concern

Sun Chunming, chief economist at Nomura Securities, had also been concerned about whether China's economy was headed for a double-dip and also whether policies introduced to rein in a soaring real estate market could have knock-on effects that would influence investment, consumption and even China's economy as a whole - however,  he's now reached the conclusion that "it won't."

According to Sun, "despite the fact that China's economic growth rate will continue to slow in the second half of 2010 and the first half of 2011, the chance of a double-dip, defined as the GDP growth rate slipping below 7 percent, is very slight. China's economy entered a solid expansionary phase in the second quarter of this year."

"There's no need to panic" according to Qu Hongbin, he explains that the economy is not contracting, it's just that the rate of China's economic growth is slowing.

"We're still forecasting that China will achieve an annual growth rate of some 9 percent in 2010."

Despite the confidence of Sun Chunming and Qu Hongbin, Zhu Jianfang, chief economist at CITIC Securities believes that if the government doesn't adjust policy settings soon, China's economy runs the risk of a hard landing.

Future Policy Settings

Dong Xian'an, chief macro-analyst at Industrial Securities, thought that recent policies offered many positive signals including a commitment to economic restructuring and the encouragement of private investment. In addition the central government also seems to be in support of increasing fiscal expenditure, subsidizing new-energy vehicles, accelerating the development of the western regions and increasing the amount invested in the construction of government-subsidized housing.

A meeting of China's politburo on July 22 set the basic course for macroeconomic policy settings over the coming months - the meeting committed China to maintaining rapid but stable economic growth, while also pushing ahead with adjustments to the structure of the economy and managing inflationary pressures.

However, the question of how best to achieve these three goals is much debated.

Liu Yong, director of the business development division at the China Development Bank, believes that it's impossible to achieve all three of the above goals simultaneously, as policies adopted to achieve each individual goal will reduce the likelihood of achieving the other goals.

Mei Jianping, professor of Finance at Cheung Kong Graduate School of Business, said the measures the government had adopted in order to curb the recent surge in house prices were too tough, but on the other hand, he also argued that the risks of overheating and systemic risks to the banking sector had yet to be eliminated.

Shen Jianguang, Chief China economist at Mizuho Securities, believes that additional credit will be released in the latter half of the year.

On the other hand, Wang Tao believes that there has already been a shift in policy and the government will neither lift the quota of the amount of new loans to be issued in 2010 or lower the capital reserve ratios of the banks.

However, Wang Tao also thinks that new investment programs targeted at specific sectors may be announced over the following months and that these programs may be introduced to the public as "new stimulus measures."