Hard landing?
Overall at any rate things seem to be going so badly in the economy that on Sunday Premier Wen Jiabao warned, yet again, that the economy is under serious pressure, and then did the same on Tuesday. According to an article in Xinhua, Wen on Tuesday July 10 reaffirmed Beijing’s commitment to growth:
Premier Wen Jiabao said Tuesday that stabilizing economic growth is the most pressing matter currently facing China. Policies and measures to stabilize economic growth currently include boosting consumption, diversifying exports and promoting investment, Wen said while meeting representatives from research institutes and companies on Monday and Tuesday.
The emphasis on investment to shore up growth comes as the world’s second-largest economy is being challenged with slumping external demand and low consumption at home. Wen said the structure, quality and cost-effectiveness of investment should be given greater importance, adding that investment should be used to improve livelihoods and help the country develop scientifically.
Given the very weak numbers, and Beijing’s reactions, China seems very clearly to be heading towards a hard landing, and many Chinese and foreign experts are urgently warning that Beijing must cut interest rates even more sharply, expand credit, and so save China and the world from disaster. We’ve already had two cuts this year in the lending rate. Here is what Xinhua said a on July 6:
The central bank cut interest rates for a second time in a month, fueling concerns that the slowdown in the world’s second-largest economy is worse than predicted. The People’s Bank of China lowered benchmark deposit rates on Thursday by 25 basis points and cut lending rates by 31 basis points, effective from Friday.
The central bank cut interest rates on June 8 for the first time since 2008 to bolster economic growth. “The limits for rates charged on individual property loans will not change and financial institutions must strictly implement differentiated policies on property loans to continue constraints on speculative purchases,” the central bank said.
A leading economist said that cutting rates twice in a month suggests weak growth. “The two cuts in interest rates within a month indicate that the GDP growth rate in the second quarter is indeed weaker than expectations,” said Lu Zhengwei, chief economist at the Industrial Bank, adding he expected that the figure would be 7.6 percent.
The cuts, or at least the first one, seem to have some impact. Although loan growth has been much slower than expected for most of this year, the June loan numbers finally surprised the market on the upside. According, again, to Xinhua:
China’s new yuan-denominated loans surged in June as the government moved to buoy the slowing economy. The June new yuan-denominated loans rose 285.9 billion yuan (about 45 billion U.S. dollars) year-on-year to 919.8 billion yuan, the People’s Bank of China (PBOC), or the central bank, announced Thursday. PBOC data showed that new yuan-denominated loans in June hit a three-month high after reaching 1.01 trillion yuan in March.
Mark Williams, at Capital Economics, added a lot more color:
China’s bank lending last month turned out not to be as weak as we had feared. Net new loans amounted to RMB920bn. This was only slightly above the median forecast of analysts surveyed by Bloomberg (RMB880bn) as well as our own (RMB900bn). But ever since the People’s Bank cut interest rates last week, we had thought that the risks to these forecasts were skewed heavily to the downside, on the belief that weak lending was the most likely trigger for the rate move.
In fact, new lending was significantly higher last month than in May when it reached RMB793bn. That suggests that government attempts to revive bank lending were starting to work, even before last week’s rate move.
The fact that the government has continued to loosen nonetheless is positive for GDP growth in the near-term. A continued pick-up in lending to fuel investment should quieten immediate doubts about the economy in the months before the leadership handover. But it is questionable how much stimulus China really needs at this point and, in particular, the degree to which more investment-led growth should be welcomed.
