Is China’s economic growth sliding downward, or could there be a revival due to export growth?

The topic on China’s economic growth is a huge debate among many in the economic and financial circles. Lately, the focus on the sustainability of China’s growth picture has become more intense when there are some signs of slowing down, despite the scepticism and conspiracy theories that are brought about by the official Chinese data. The lack of transparency in the data has forced many investors to look for alternative sources of data, ranging from HSBC’s Purchasing Manager Indices (PMIs), to other private sector data in order to get a true sense of what is really going on in the Mainland.

In a news article published on June 09, 2013, it was reported that China’s official trade, inflation and lending data for the month of May have missed expectations, signalling possible downturn in the months ahead. The official data published during the weekend of June 08 does confirm a downward trend in terms of economic growth prospects going forward. Industrial growth data rose by less-than robust 9.2 percent growth compared to last year, and factory-gate prices fell for a 15th month. The data also showed that export gains were at a 10-month low following the massive crackdown on fake trade invoices. Fixed asset investment growth slowed, and new Chinese Yuan denominated bonds declined. With the revised growth picture during the month of May 2013, economists surveyed by Bloomberg has trimmed economic growth, as measured by the Gross Domestic Product (GDP) growth for 2Q 2013 (April to June) to a median projection of 7.8 percent from 8.0 percent previously.

The question is how China, one of the more prosperous countries when measured by GDP growth, ended up in suboptimal growth despite the various rounds of stimulus through overseas Chinese Yuan trading, the government budget surplus, and the fiscal stimulus that is ‘pumped’ into the economy in the form of infrastructure building,, etc. There are many sceptics out there in the markets casting doubts on the actual value of the Chinese Yuan currency, as the currency is highly controlled by the Central Government authorities in Beijing. Some are questioning whether the latest exports data has shown some gaps over China’s ability to insulate itself entirely from the overall global economic slowdowns taking place in many parts of the world. The United States is still growing at a weak pace, while the European Union (EU) through the European Central Bank (ECB) has forecasted growth within the 17-nation Euro Zone economies is likely to decline 0.6 percent during FY 2013. Similarly, based on the latest economic data published on March 2013, it also showed that US did not fare any better, with growth expected to decline 0.5 percent.

In my view, I believe that China’s economy has not shown much significant growth following the post Global Financial Crisis (GFC) in 2008 – 2009. The Chinese economy showed some signs of resilience during the GFC, however, with the changing demographics, rich-poor divisions, its continuing one-child policies, the debt-fuelled growth, intellectual property (IP) rights issues, etc., growth is starting to moderate. There are many analysts and so-called China optimists who are still touting China’s growth as continuing, but I have to say that I am on the sceptic side of the fence, as it is quite impossible to achieve rapid growth without considering the structural changes to the economy, including ridding it’s institutions from corruption, doing away with central planning of the economy, the continued lack of transparency, an inability to satisfy the vast diverse needs of its population etc. These factors are probably hindering China’s growth in the long-run, and although, the economy could achieve beyond the average growth of 2.0% to 3.0% seen in most major developed countries (or the G-8 developed countries), but it is quite doubtful that it is able to surpass its past record, which has been north of 10.0 percent growth during the pre-GFC era. In a Bloomberg Television interview during Asian morning hours on June 11, 2013, host Susan Li interviewed prominent China observer, former Morgan Stanley Asia Economist, and currently a New York University (NYU) Professor, Mr. Stephen Roach regarding China’s growth momentum, and whether the latest trade data released over the weekend of June 08, 2013 showing weakness in exports is of any significance. During the interview, he mentioned that he is still a believer a China’s growth potential, and defended his analysis by stating that China’s economic landscape has changed from a manufacturing-focused economy to a services-oriented economy, and one should look on the bright side of things in China. He admits that China is slowing, but growth is not expected to grind to a halt. Then, there are the sceptics including famous hedge fund manager, Mr. James Chanos of Kirykos Asset Management who is considered one of the prominent perma-bears on the Street regarding the subject of China’s economic growth fundamentals, and he stated in the past that with a debt-fuelled growth like China, including the ‘bubble-like’ real estate fundamentals, and the lack of transparency through a shadow banking system, there could be many casualties if the Chinese monetary authorities choose not to move fast enough to temper the enormous debts incurred . Companies, especially the small and medium sized enterprises (SME) are also probably facing cash flow cycle (CCC) issues due to the heavy losses, and closure of many SMEs throughout the Mainland. It is especially significant in the final reading of the HSBC PMI data, which was released last week, showing a contraction of 49.2 released last week, from its late May 2013 preliminary reading of 49.6. The neutral reading is 50.0, indicating neither contraction, nor expansion.

In all, I believe that China still has a long way to convince investors and the Chinese people whether the new leadership led by President Xi Jiping will lead China to the right path of growth with moderate inflation, slow down the rate of exuberance seen in the past with the real estate market, bridging the divide among the rich and poor, instituting a comprehensive set of internationally recognised human rights accord, environmental protection, food safety, etc. There are a whole host of issues that the relatively new Chinese leadership has to deal with, and observers will be keenly watching the future developments ahead.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc