Slowdown in Chinese Provincial growth rates – Does it point to the signs that China’s full-year economic growth forecast for 2013 of 7.5 percent will be missed?

In a Bloomberg Online article published on July 30, 2013, it was reported that many Chinese provinces recorded first-half economic growth rates below the average annual targets of 7.0 to 7.5 percent. This has led to many investors expressing their concerns regarding the overall depth of the ongoing slowdown in the world’s second largest economy.

The July 30 Bloomberg article report was referencing to a comprehensive analysis conducted by the news bureau indicating that seventeen of the thirty provinces and provincial-level cities during the first half of 2013 showing signs of falling short to the overall national target of 7.5 percent economic growth trajectory. In the report, Bloomberg highlighted some of the vulnerable provinces, and cities including Inner Mongolia, Jilin, Ningxia, each reporting an average of 3.0 percentage basis points (bps) below the 12.0 percent target. The report covers many coastal, and inner cities, and provinces, however it was unable to obtain the latest growth figures from Qinghai during press time. On the other hand, some cities including coastal cities such as Shanghai recorded higher than expected economic growth rates of above the first-half national average of 7.6 percent.

This latest report on provincial growth rates highlighted some of the fallouts as a result of a weak economic environment, coupled with the tightening of interbank lending rates during the month of June when interest rates at one point, shot up close to nearly 12.0 percent, before turning downwards to a more measured level of approximately 3.0 to 3.5 percent. The lack of a vibrant industrial production sector has led to the Chinese people finding themselves unemployed following the shutdown of many production plants, coping with slowing export demand, especially those coming from the European Union (EU) countries, and the United States, where most of the multinationals have returned back to their home country as labour, and raw material costs started to rise in China.

In recent weeks, there have been various news reports that discussed about the slowdown in China culminating to the July 26, 2013 news report that the Chinese government has ordered several industrial production facilities to temporarily halt production in order to ease the excess production capacity recorded by most factories. In addition, in a recent flash HSBC Purchasing Managers Index (PMI) report for the month of July 2013, it showed a severe contraction in manufacturing output at 47.7, down from the official June figure of 48.3. A reading of 50.0 suggests neither contraction nor expansion. The various signs of economic slowdown in China do point to a growing pessimism regarding the Central Government’s ability to maintain or surpass its official economic forecast for 2013 at 7.5 percent. A highly anticipated official PMI report is due out at the end of July, which many analysts have forecasted a contraction in industrial production for the month of July 2013, further reinforcing the realities of China’s economic slowdown is imminent.

The July 30 Bloomberg article quoted one of the comments by Yao Wei, a China economist for Societe Generale SA in Hong Kong saying that that the growth targets set out by many local governments were too aggressive to begin with, thus fuelling the high expectations among the Chinese policymakers, businesses, and its people. However, due to the credit tightening conditions experienced by the country since June 2013, it is not surprising that these local governments could not meet their economic growth targets. This puts into question on the basis of the provincial governments’ growth projections, and whether they have deliberately overstate their growth targets in order to receive a greater share in the Central Government’s budget for infrastructure projects. However, such deliberate overstatements of growth have also caused by Chinese people to question how are these finances being spent appropriately and whether there are cases of impropriety when it comes to the allocation of local, and municipal funds to infrastructure projects, including bridges, railways, roads, schools, power grids, water sanitation, health, etc. This could be turn out to be an issue if public trust and faith is being taken for granted, especially when the Central Government is trying to maintain social stability as part of their governance manifestos.

In response to the various signs of an economic slowdown, the Chinese leadership has so far taken quite a non-interventionist stance, preferring to manage the expectations of the Chinese people and investors. So far, since the new Chinese leadership transition in April 2013, touted as once-a-decade leadership change, the new leaders have not adopted any major aggressive fiscal stimulus measures such as massive public infrastructure spending, etc. in order to cope with the slowdown. Instead, the new Chinese leaders have repeatedly came out to say that they are quite satisfied with the ongoing measured pace of economic growth, so long as it does not threaten the entire economic and financial system in the country. They have also urged investors to relook at China’s economic fundamentals by not overly emphasising on the impending slowdown in China’s growth trajectory as any indications of a severe recession ahead, and should instead view the slowdown as an opportunity to gain a foothold in many of the undeveloped industries such as green technologies, environmental safety, etc. which are highly in demand given the energy consumption levels still relatively high, and the increasing focus on managing food and water sanitation issues in light of the recent health scares involving food and poultry consumption.

I do believe that China is at the crossroads of increasingly becoming a maturing economy, and the slowdown is inevitable. However, I do also believe that the Chinese government needs to do more to enhance transparency, promote free trade and investments, tackling its structural issues including the ‘one-child’ policies, doing away with the ‘hukou’ system which unfairly discriminates rural migration, education spending, etc. These issues ought to be addressed in its entirety, and not leave it to the next generation, and/or leadership to resolve them. Perhaps, the ongoing slowdown seen in China could be a wakeup call for many Chinese policymakers to do more in order to maintain economic sustainability, and stability for the sake of its current generation, and future generations to come.

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

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