Does history suggest China growth is about to rebound?

BEIJING Sun Sep 9, 2012 10:46pm IST

A vendor lies on the ground as he waits for customers in Kashgar, Xinjiang Uighur Autonomous Region, September 9, 2012. REUTERS/Stringer

A vendor lies on the ground as he waits for customers in Kashgar, Xinjiang Uighur Autonomous Region, September 9, 2012.

Credit: Reuters/Stringer

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BEIJING (Reuters) - The last time China's vast manufacturing sector had conditions like those in August it was March 2009 and the economy was about to rebound from the global financial crisis.

This time around analysts are not so certain a clear recovery for the major global growth engine will come anytime soon.

In fact, two purchasing managers' indexes showed new orders are falling, adding to other evidence that suggests a slide in economic growth for the world's second-biggest economy is deepening, pushing back expectations for when a rebound may occur.

"It's quite clear we have a pretty rotten industrial cycle coming on. I don't see it getting a whole lot worse... but I don't expect them to get back for a long, long time," said Arthur Kroeber, managing director of GK Dragonomics in Beijing.

"I see things bouncing along at the bottom of the cycle."

An HSBC purchasing managers' index released on Monday fell to 47.6 in August, its lowest reading since March 2009 and a similar survey by the National Bureau of Statistics on Saturday showed the manufacturing sector shrinking for the first time since November.

A reading below 50 points to contraction, while one above 50 indicates expansion.

Still, the HSBC PMI adds to other figures that suggest the economy is revisiting 2009. Industrial output growth in July rose at its weakest pace since 2009 and exports were rising at their lowest trajectory since that year, excluding a fall in January.

The Shanghai stock market .SSEC has slumped almost 18 percent from this year's highs to levels last seen in March 2009.

Second-quarter 2012 GDP figures, the latest available, showed economic growth running at its slowest pace since the first quarter of 2009, re flecting domestic property market curbs and weak exports demand from Europe where fears of a recession are mounting.

In March 2009, the clank of construction hammers began again in Beijing after months of silence. Internationally, markets began a sharp rebound after policymakers in major countries flooded their economies with cash to extract themselves from the crisis spurred by the collapse of Lehman Brothers.

SLIP-SLIDING AWAY

In March 2009, the Chinese economy was recovering from a far worse crisis, in part thanks to a huge 4 trillion yuan stimulus package put in place by Beijing.

Growth in the March quarter of 2009 hit 6.1 percent. Second quarter growth this year is the lowest since then but was still much higher at 7.6 percent.

Still, the picture today is of an economy slipping into a deeper-than-expected slowdown, in part thanks to the consequences of the stimulus package, which fired up inflation and the real estate market.

Central government curbs on real estate to calm prices and support a policy of affordable housing have combined with the impact of the European debt crisis on global demand to drag China's economic growth down.

For manufacturers, the chief concern is soft new orders, particularly from the euro zone.

The HSBC report showed new orders overall and new export orders falling at their fastest pace since March 2009, helping drag output back into contraction after a more hopeful July.

Finished stocks are at a record high and backlog of orders at the lowest since January 2009.

"The current slowdown is caused by both cyclical and structural factors," said Zhu Baoliang, chief economist at top government think-tank State Information Centre, adding that further monetary easing would do little to counter the slowdown.

"The manufacturing sector is undermined by the destocking process."

The government PMI showed new orders falling for the fourth month in a row. Export orders were falling, but the sub index stabilised at 46.6 compared with July.

DIFFERENCES

While there are parallels now with the global financial crisis, there are also key differences that help explain why policymakers are less aggressive in trying to stimulate the economy. Most critical in China's case is employment.

In contrast to heavy job cuts during the winter of 2008-2009, employment has held up reasonably well, assuaging fears of social unrest in a year when the Communist Party is aiming for stability as it conducts a once-in-a-decade leadership change that will see President Hu Jintao and Premier Wen Jiabao replaced.

"I think we should also look at the employment situation, which has yet to show any big problems.. we haven't seen big layoffs," said Zhu of the State Information Centre.

Beijing launched its stimulus package during the global financial crisis after at least 20 million migrant jobs were axed in a matter of months as global trade froze.

Major exports, including China, Japan and South Korea, are feeling the pinch of weakening trade, but not to the same extent as the global financial crisis.

Policy could change in China if employment begins to show signs of consistent strain. The official PMI employment sub-index showed a third month of contraction in August, slipping to 49.1.

The employment sub-index for the HSBC survey -- whose private-sector respondents are more likely to react quickly in hiring and firing -- reached 47.6, its lowest point since March 2009 and its sixth month below 50.

Economic growth has weakened for six straight quarters in this latest down cycle. It did so for seven straight quarters during the global financial crisis before turning course to pick up, Thomson Reuters data shows.

If history is a measure, that suggests growth will ease again in the third quarter and start to rebound in the fourth quarter.

DELAYED RECOVERY

Beijing is moving cautiously in trying to support the economy in what it calls a "prudent" policy stance, for fear of re-igniting property and inflation risks.

Still, its policies so far have shown no significant sign of arresting the slide in the economy's growth. Indeed, analysts are cutting their expectations for the economy further in the wake of July's economic data and the PMIs.

Barclays said on Monday there were downside risks to its full-year growth forecast of 7.9 percent, citing the gloomy PMI results.

Mizuho Securities cut its expectations for China's third-quarter GDP growth on Friday to 7.4 percent and said it could slip further in the fourth quarter to 7.2 percent.

Just in July, the consensus forecast in a Reuters poll of economists was for third quarter growth of 7.9 percent.

Li-Gang Liu and Zhou Hao of ANZ Bank forecast 2012 growth of 7.8 percent, just above the government target of 7.5 percent.

"We believe that China's two interest rate cuts and liquidity injections into the market via large-scale reverse repos have not had substantial effect as many data show China's economic growth momentum is clearly decelerating," they wrote.

Wang Jun, economist at the China Centre for International Economic Exchanges, a government think-tank, said third-quarter growth could even slip below 7.5 percent.

"We still cannot see any signs that growth is bottoming out," he said.

Many analysts believe the central bank will continue to loosen policy further by cutting interest rates and banks' required reserve levels, but doubt Beijing will resort to the dramatic action seen in 2008-2009.

Xianfeng Ren and Alistair Thornton of IHS Global in Beijing said the government had underestimated the pace of the slowdown but policymakers are cautious for fear of reliving the excesses caused by the 4 trillion yuan stimulus. Policy tools are also losing their impact as more capital flows out of China and loan demand is weak.

"Lastly, as if it had escaped anyone's attention, there is a once-a-decade wholesale leadership swap happening in the next couple of months - minds are not solely focused on the economy," they added. (Additional reporting by Kevin Yao and Langi Chiang: Editing by Neil Fullick)

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