Chinese Growth Caution

The reason for the question, a weaker than expected export performance which could see China fall short of the official 8% target for 2009. (It grew an annual 6.1% in the first quarter).

A second, more senior Chinese Government official has now warned that the export performance this year won't be strong.

That was after a milder warning was issued around 10 days ago by another official who estimated exports could be down 20% for the first half of the year and 5% to 8% for the full year (Which would imply a big rebound in the second half, although that point was not made).

The news could mean that countries like Australia, which have staked much on the Chinese rebound, could be found short.

But the World Bank seems to have no concerns as it has pushed up its estimate for Chinese growth to 7.2% for the year from the earlier forecast of 6.5%.

"Government-influenced investment has soared," the Bank said.

"Market-based investment has lagged, although positive signs have emerged in the real estate sector.

"Consumption has held up well.

"Very weak exports have continued to be the main drag on growth, while import volumes have recovered in the second quarter of 2009 as raw material imports rebounded."

The bank said that "market based investment is likely to continue to lag for a while because of a squeeze on margins amidst spare capacity in many manufacturing sectors.

"Prospects for real estate activity appear reasonably good, but consumption is unlikely to pick up speed.

"In all, the World Bank thinks that China's growth is unlikely to rebound to very high single digit rates before the world economy recovers convincingly, and projects GDP growth of 7.2 percent in 2009.''

"Government-influenced investment will strongly support growth in 2009.

"However, there are limits to how much and how long China's growth can diverge based on government influenced spending," said Ardo Hansson, the World Bank's lead economist for China.

"It is too early to say a robust sustained recovery is on the way."

With government revenues falling and expenditure rising rapidly, the Bank predicts China's fiscal deficit will rise to almost 5 % of GDP this year, well above the 3% of GDP budgeted by Beijing and a large jump from last year's deficit of 0.4% of GDP. (Australia's could end up around 5% in the 2010 year).

"On current projections it is not necessary and probably not appropriate to add more traditional stimulus in 2009," said Louis Kuijs, senior economist and main author of the World Bank update.

"One reason is that the fiscal deficit is on course to be significantly higher than budgeted this year and additional stimulus now would reduce the room for stimulus in 2010."

So it will be down to the Government spending campaign to keep the economy chugging along, but for how long.

That's why the underperformance of the export sector has greater importance for China's growth prospects than many commentators think.

At the same time a "Buy China first policy" has emerged from the government, according to media reports, which sends a further signal that the Chinese Government is nervous about the strength of the response in the economy to the stimulus spending and wants to keep as much of the money working inside China.

The latest warning about the export performance came in a story in the official China Daily website and paper, which was later reported on the Xinhua website and newsagency reports.

"Export growth is unlikely to rebound in the short run and it's difficult to realize the 8 percent target for foreign trade growth this year," Li said in an address to a Standing Committee meeting of the National Committee of the Chinese People's Political Consultative Conference, the nation's top political advisory body. (Source)

"During his two-hour speech, Li briefed the nation's top political advisors on the latest economic situation, the effect of the stimulus package and the priorities for the government during the rest of the year," Xinhua and the Daily reported him as saying.

"Top policymakers set a target for the nation's foreign trade to grow 8 percent earlier this year, the same rate as the nation's expected GDP growth target.

"However, the nation's trade volume for the first five months shrunk by 24.7 percent, compared with the same period a year earlier.

"Li said the fast contraction in foreign demand was posing an "unprecedented" challenge to the nation's economy, which showed positive signs over the past months.

"He reckoned the economy might have stabilized in the first half, after its growth sank to an annualized rate of 6.1 percent in the first quarter.

Xinhua said that in recent months optimism had grown that China's economy would rebound, thanks to the effect of the government's $US585 billion stimulus package and solid consumer spending.

In the first five months, the central government spent 562 billion Yuan on major infrastructure projects and social welfare efforts.

That was more than 60% of the central government's budgeted investment for the year.

Bank lending has been strong, investment high, industrial production has been rising, with an 8.9% annual rise in the year to May reported last week.

But that was more than 12% down on the annual rate in the year to May 2008.

Car sales rose 47% in May; coal and steel production was higher in the month as well.

Xinhua quoted Li Wei, an economist with Standard Chartered Bank as saying that "Government-sponsored projects and the real-estate recovery are likely to ensure strong investment growth throughout the year, and into 2010."

But he said said China's industrial production momentum to remain weak for the rest of the year and the nation's recovery to be slow, just like other parts of the world.

But the Financial Times and other media outlets reported last night that China had introduced an explicit "Buy Chinese" policy as part of its stimulus in a move that will create more tensions with trade partners and increase the likelihood of protectionism around the world.

"In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms, The FT reported.

"The government also said it was launching an investigation in response to complaints from domestic industry associations which accuse local governments of favouring foreign suppliers in procurement related to the country's Rmb4,000bn ($US585 billion) economic stimulus package.

Just a few months ago Beijing was raging against a Buy America clause included in the US economic rescue package. It has complained this week about a similar Buy Australia policy in the NSW Government budget.

"Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages," Yao Jian, a Chinese commerce ministry spokesman, told reporters in February about the scheme in president Obama's stimulus package.

"We express deep concern about these [measures] ... under the current financial crisis, measures issued by all countries should not cause negative impacts, and especially they should not send out wrong messages."

The FT said the edict was issued jointly by the legislative office of the State Council, China's cabinet, the national development and reform commission (the country's powerful state planning agency) and the ministries of industry and information, supervision, housing, transport, railways, water resources and commerce. So it has pretty widespread support.

The new edict bans local governments and departments from discriminating against domestic suppliers in their procurement.

The Government's stimulus package seems to be excluding foreign companies inside China, and only using foreign sourced raw materials (copper, iron ore, coal etc).

The new policy and the official warning about growth means that the Chinese Government is becoming very nervous about the economy, and the year isn't half over.

The extent of the official concern can be seen from this short report on Xinhua of a "brainstorming session on the economy at the National Committee meeting in Beijing this week.

"China's political advisors brainstormed Wednesday on the country's economic development and offered suggestions about coping with the impact of the global downturn.

"They gave their advice as the standing committee of the 11th Chinese People's Political Consultative Conference (CPPCC) National Committee continued its sixth meeting, which started Tuesday.

"Li Yining, a renowned economist and one of the members of the standing committee, said restructuring and innovation were pivotal for an economic recovery. Once the problems of fair play and difficulty in financing were solved for private companies, their potential for innovation would emerge.

"Other proposals ranged from fostering new growth poles to solving social disputes.

"Jia Qinglin, chairman of the National Committee of the CPPCC, was present at the meeting.

"He said Tuesday that maintaining steady, relatively fast economic development and safeguarding social stability and harmony were the foremost tasks facing China, and he asked the participants to focus their discussions on these themes and make valuable suggestions."

Note that this 'brainstorm' was between political advisers, not economists. Note also the use of the phrase by Mr Jia in his reported comment "relatively fast economic development and safeguarding social stability and harmony were the foremost tasks facing China."

The Chinese Communist Party Government is paranoid about social stability and harmony and the threat to it from (in 2007 and 2008) from rising inflation and high prices for food, petrol and everyday products.

Now it's trying to generate economic growth to stabilise the growing number of unemployed in China, especially in coastal provinces.

This paranoia about harmony was reflected in the quietly reported decision this week by the Government to start stockpiling unsold pork meat.

According to reports in Chinese media (in English) the reason is to stabilise prices and protect pig breeders.

China's National Development and Reform Commission (NDRC) said an oversupply of live pigs would last for some time, and it advised pig breeders to reduce the sows and piglets on hand.

To avoid bringing down market prices, the Commission said the stockpile price should not be lower than the average wholesale price in the area.

Pork prices fell 32% in May because of the oversupply (there was an infection in 2007 and early 2008 that cut herd numbers and saw a surge in breeding). Then there's the concerns about swine flu, which seems to have cut the consumption of pork.