China’s easy-growth era drawing to close

[WallyWeaver]

I still crack up at articles like this.... 7 - 7.5% growth means China is slowing down. It's been said many times and I'll repeat it: We would be doing back flips over here in the US with 7% growth!

China’s easy-growth era drawing to close

June 5, 2012, 7:31 p.m. EDT

By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) — China will have a hard time living up to its growth targets this year, according to analysts who say a reality check could be forthcoming for policy makers seen as able to fine-tune the economy at will.

Ironically, many of the conditions than helped to foster China’s rapid growth in the recent past are now set to weigh negatively on the economy, auguring an extended period of weak growth, the analysts say.

Credit Suisse said Monday it believes China is now entering a structural downturn, pointing to important changes in the housing market and a currency that no longer appears undervalued, as among six factors that appear “less promising” for China’s growth outlook.

The analysts also cited China’s entry into the World Trade Organization, which is widely believed to have helped propel Chinese growth throughout the 2000s but which may offer significantly less support in the era of weaker global growth.

Likewise, the large proportion of investment as a share of China’s economy — previously seen as catalyst that helped to spur activity — looks problematic in an industrial landscape glutted with excess capacity, they said.

Credit Suisse said weaker readings for two Chinese manufacturing surveys released Friday underscored its view of underlying economic vulnerability which surfaced in recent monetary statistics.

China’s policy makers, they said, appeared to be pushing on a string when it came to injecting more credit into the economy in April. Data for the month showed tepid loan growth, even as financial authorities ended a ban on bank lending to local governments.

Deteriorating growth in deposits held within domestic banks was also a big warning sigh, Credit Suisse said, noting that the rate of expansion had slipped to its lowest level on record.

“This suggests that the real cost of deposits, and consequently the real cost of capital, has to rise,” Credit Suisse analysts wrote in the note.

Tough target

In March, China’s senior leadership pared the national growth target for this year to 7.5% from 8% — altering a benchmark for the economy that had been in place since 2005.

Andy Xie, an economist and board member of Rosetta Stone Capital, believes China could struggle to meet even the lower growth target.

“The days of easy growth are gone, meaning that the government must address problems linked to low household income and excess investment,” Xie said in a commentary published in Caixin on Monday.

Xie believes the economy is headed into a rough patch, as there’s little China can do to turn things around this time. Efforts to juice economic growth through investment and other forms of stimulus spending are unlikely to find traction as they did in 2009-2010, he said.

Unlike in 2008, when China initiated a massive package of new spending to rescue its economy, Xie said there’s little need for new rounds of investment after a long period of rapid credit growth.

“China is investing too much already,” he said.

Another problem is that the multiplier from new rounds of stimulus will be weaker than in the past, owing to a tight labor market and other cost-pressures related to new investment projects.

Xie acknowledged, however, that some investment spending could help to cushion the economy from a overly rapid slowdown.

Meanwhile, Credit Suisse said China’s banks were in no shape for another huge round of loan growth similar to 2008, which helped it to finance an infrastructure-building binge that shielded the economy from a slump in global exports.

Stimulus cometh

Although it might not have a major impact on economic activity this time around, some sort of government spending is expected.

Beijing is likely to roll out stimulus of 1 trillion-2 trillion yuan ($157 billion-$314 billion), but the net effect will be much reduced for a Chinese economy that’s now 60% larger than it was in 2008, Credit Suisse said.

At the lower end for the estimate of 1 trillion yuan, the net effect would be about one-tenth the size of the 4 trillion yuan package unveiled in 2008, when adjusted for the growth in the economy, the bank said.

Another concern is the possible delay in stimulus amid a senior-level leadership change later this year.

“We are concerned that politicians may want to lower growth structurally, but also that there is little point in having a huge stimulus before leaders are appointed,” Credit Suisse said.

Meanwhile, the latest data continued to paint a lackluster picture of the Chinese economy.

Data released Tuesday by HSBC showed China’s services sector expanded in May at its fastest pace in 19 months, as the services Purchasing Managers’ Index rose to 54.7, up from April’s 54.1

However, the result remained below the long-run trend of 56.7, HSBC said.

A rival government-sponsored services PMI, released Monday, printed at a slightly stronger 55.2, though the headline reading indicated a weakening trend from April’s level.

Some analysts said the improving trend seen in HSBC’s PMI might be misleading, as it excludes some of the-hardest hit sectors of the Chinese economy.

Piper Jaffray’s Andrew Sullivan said the two surveys offered different snapshots of the economy, with the government’s version including coverage of the construction sector, “which has seen significant slowing recently.”

In contrast, HSBC’s version spans about 420 companies, about one-third the size of the 1,200 firms in the government’s survey, and excludes construction but includes banks and financial companies which are left out of the government’s survey.

The data followed the release Friday of the separate manufacturing PMI surveys, one from the government and another from HSBC, pointing to deteriorating activity in China’s factories.

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