Will the dragon run out of steam?
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In recent months, we have seen China's exports weaken, causing Chinese policy-makers to speak of the difficulty that the country will have sustaining high growth in 2012.
At the end of February, the People’s Bank of China (PBC – the Chinese central bank) cut reserve requirements, the second time it had done so in recent weeks following an earlier reduction in December 2011.
Most analysts still forecast a “soft landing” for the Chinese economy in 2012. Even the Chinese government sets its GDP growth target at 7.5 per cent this year, down from 8 per cent in 2011. In any case, a sharper-than-expected downturn in China would certainly be another severe blow to global economic recovery and would badly affect the Thai economy, as China is now Thailand’s top trading partner.
The caution among Chinese policy-makers was echoed last month by the IMF, which suggested that China’s GDP growth could fall by around 4 percentage points from its forecast of 8.25 per cent in 2012 if certain risk scenarios surrounding potential financial volatility from the euro-zone debt crisis were realised. The IMF suggested that in this scenario China should respond with a significant fiscal stimulus package worth around 3 per cent of GDP.
Census economic growth forecast for China for 2012 is 8.2 per cent. This would be slower than last year, when growth exceeded 9 per cent, but would still represent a relatively benign outcome in the context of the slowdown in the global economy and the enormous risks posed by the financial crisis in the euro zone. Should global conditions deteriorate more than expected – which could happen, for example, if the crisis in the euro zone spirals further out of control – then China’s own growth prospects would suffer.
Yet if that happened, there are several reasons for believing that China would be able to respond with stimulatory measures providing temporary relief. For one thing, inflation concerns will ease somewhat in 2012 as global non-oil commodity prices fall back from recent highs, giving the authorities greater room to ease monetary policy.
Under current conditions, China is unlikely to cut interest rates, both because inflation remains above targeted levels and because rates are already artificially suppressed; to lower interest rates further would undermine the government’s goal of gradually shifting to more market-based interest rates. But if external conditions worsened appreciably, then the PBC might rethink its stance and cut rates.
For another thing, China still has some scope for renewed fiscal stimulus; its capacity to do so having been boosted by record levels of fiscal income. Revenue increased to 10.4 trillion yuan (US$1.6 trillion) in 2011, representing a rise of 25 per cent from 2010. Receipts from the largest single revenue generator, value-added tax, rose by 15 per cent to 2.4 trillion yuan.
At the same time, fiscal expenditure reached 10.9 trillion yuan, leaving a slim deficit of 519 billion yuan. On paper, this puts China in an enviable position compared to the US and western European countries that are struggling with heavy public debt loads and, in many cases, the need for growth-crimping austerity.
In any case, strong GDP data for the fourth quarter of 2011, when real growth was unexpectedly high at 8.9 per cent year on year, support most economists’ view that China will avoid a hard landing in 2012. The authorities’ recent lowering of bank reserve requirement ratios indicates that they have become concerned that economic growth is faltering. Yet policy loosening has proceeded at a modest pace, suggesting that – despite these concerns – the government still feels comfortable enough with the underlying prospects for the economy. I expect gradual relaxation of credit and monetary constraints to continue over the first half of 2012, but as growth strengthens in the second half, loosening will then be paused and, in the last quarter, eventually reversed.
However, in the worst-case scenario of China’s dramatic economic slowdown, the only positive effect would be potentially lower energy prices. Over the past three decades, China’s energy demand has soared as a result of strong economic growth. Total energy consumption in 2011 amounted to an estimated 2.6 billion tonnes oil equivalent (toe), representing growth of 130 per cent since 2001. In 2009, China overtook the US to become the largest consumer of energy in the world. However, the country’s average energy consumption per head is low, at less than one-half of that in Japan and only around one-quarter of that in the US, illustrating the substantial potential for Chinese energy demand to grow as the economy develops further. This trend could potentially be halted if the Chinese economy experienced drastic slowdown.
Looking ahead, there is a risk that China could suffer a sharp slowdown in economic growth in the next five years. The frothy local housing market and excessively high levels of investment are the most likely sources of turbulence.
The government’s capacity to counteract economic crises is strong, but its ability to do so without aggravating imbalances that already threaten the economy is uncertain. Nonetheless, Thailand must carefully monitor the economic situations in China very closely. Maybe the Dragon may run out of steam in the near future!
Dr Chodechai Suwanaporn is executive vice-president of economics & energy policy at PTT Public Company Limited. [email protected].
