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THE likelihood of double-digit growth has dissolved in china, and the risk of a sub-7 percent growth rate in one of the quarters next year has increased meaningfully.
china’s economic growth has slowed from 9.1 percent year on year in the third quarter of 2011 to around 8.2 percent year on year in the fourth quarter of 2011.
industrial production growth decelerated in november to the lowest reading since the first half of 2009, and electricity production growth is growing at single digits for the first time this year. For the first time since the fourth quarter of 2008, manufacturing and non-manufacturing Pmi (Purchasing managers index) simultaneously slipped into contraction in november.
Growth is expected to come in below 7.5 percent year on year in the first quarter of 2012 – the first sub-8 percent print since mid-2009. Apart from the growing likelihood of an external shock, if investment falls, china is in serious trouble because the rest of the economy will need to grow twice as fast to compensate, and that isn’t a viable alternative in 2012. investment growth may decelerate, but a slump is unlikely. investment-toGDP ratios are still low across china, with sizeable capacity in the central and western regions.
Worryingly, around a quarter of the recent investment surge has siphoned to real estate. Since 2004, fixed asset investment in real estate has increased by over 20 percent per annum, leading to house prices doubling in 35 cities. Then, quite dramatically, investment in property peaked in 2010 – growing at 38 percent in 2010. The chinese Government has put in place a plethora of policy initiatives to engineer a deceleration of prices and siphon speculative forces from the sector. As a result, 15 (out of 37) cities saw month-on-month price declines in november. Looking ahead, prices will fall further as developers try to boost sales. china Vanke co. Ltd., the largest property developer in china, suffered a 36-percent year-on-year fall in sales during november– the fourth consecutive and largest fall so far in 2011. Looking further ahead, more restrictive regulations has forced many potential homebuyers out of the market, which adds another layer to demand, which is structurally underpinned by rapid urbanization, modernization and growing incomes. china has around 225 million urban households, but around 150 million homes. Another 100 million people will join cities over the next two decades. However, any miscalculation could result in anger. many homeowners have their life savings in the property, which are shrinking – especially in buildings where developers are offering steep discounts.
Credit Crunch
Small and medium-sized enterprises (SmEs) have faced the brunt of credit tightening. Typically small firms in the chinese mainland use retained earnings or private sources of capital to fund themselves. So, when cash flows were strained this year – in large part due to falling export orders and rising input costs –and credit conditions tightened, absent of established adequate credit lines, small firms were pushed to unsustainable sources of credit in the shadow banking sector. Private funding is estimated to be worth the equivalent of at least 20 percent of lending during the past two years. The surge of defaults in Wenzhou, east china’s Zhejiang Province, is just a start. Worse is to come as private lenders traditionally call their outstanding loans before the chinese new Year. The State council has already announced a few measures that will direct funding to SmEs.
The People’s Bank of china (PBoc) has already acted to support activity, cutting the reserve requirement ratio (RRR). inflation has fallen from a cyclical peak of 6.5 percent year on year in July, down to 4.2 percent year on year in november. in response, the PBoc announced a “pre-emptive” reduction to the RRR – by 50 basis points to 21 percent. The reduction is the first one in exactly three years, freeing 380 billion yuan ($60.3 billion) of bank capital. in 2012, headline inflation will average just below 4 percent, providing space for more reductions. The RRR will fall to 18.5 percent by the end of the first quarter of 2012 and interest rate cuts are not expected in 2012 but yuan appreciation will continue. The yuan/USD is on course to appreciate from 6.36 to 6 by the end of 2012, adding purchasing power to the nation.
China and Africa
Trade between china and Africa will surpass $155 billion in 2011. Since 2003, Sino-African trade has increased by nearly 500 percent. indeed, integration has been so swift that in 1990, no African countries had trade with china above 5 percent of GDP. Yet by 2008, near two dozen had. Plus, nearly two thirds of African nations list china as a top-five trade partner. And, unlike Africa’s trade with longstanding advanced nations, SinoAfrican trade proved resilient in the wake of the financial crisis.
Given china’s growing importance in Africa and china’s economic deceleration, fear mongering is growing, but misplaced. What really matters is that china’s economy is nearing $7 trillion. it is nearly twice the size of Germany and three times the size of the UK. Therefore, in absolute terms its contribution to global demand (even if its economy slows to 7 percent growth) is continually increasing, and that is what drives Sino-African trade and investment.
in 2012, china will still consume the most coal, copper, nickel, steel and tin in the world and second most oil and lead. it is true that the energy intensity of china’s GDP is declining, but the demand overhang does mean that china relies on imports of raw materials. Add growing food demand in china from the growing middle class (one only needs to look at pork prices in china to see the impact of changing diets), and Africa role is clear. currently, more than 60 percent of the planet’s available uncultivated cropland is in Sub-Saharan Africa, but only 3 percent is prepared for irrigation, compared with 40 percent in Asia. Sure, Africa is a long way from being a world bread basket, but in areas like coffee, tea, tobacco, cocoa, soybeans, fruit and so on, Africa will become increasingly important.
many of state-owned enterprises (SoEs) encouraged to “go out” have subsequently been successful in Africa, growing revenue streams through African operations and diversifying, to become independent engines. Future cash flows from projects here look favorable and as such are now looking to expand their presence on the continent.
it is also obvious that commercial ties have just started. The 2,000 or so chinese companies with operations in just 17 African nations in which Standard Bank is present and the 1 million chinese people in Africa obviously have a long-term agenda.
one thing that is clear - Africa is open to chinese investment and can serve as a pressure release for china’s excess capacity and create employment through infrastructure deals. Africa offers china investment alternatives (real assets) to dollar-denominated fixed income products which suits china’s desire to passively diversify its consistently accumulating foreign exchange reserves.
(The author is an economist with South Africa’ Standard Bank Group)
china’s economic growth has slowed from 9.1 percent year on year in the third quarter of 2011 to around 8.2 percent year on year in the fourth quarter of 2011.
industrial production growth decelerated in november to the lowest reading since the first half of 2009, and electricity production growth is growing at single digits for the first time this year. For the first time since the fourth quarter of 2008, manufacturing and non-manufacturing Pmi (Purchasing managers index) simultaneously slipped into contraction in november.
Growth is expected to come in below 7.5 percent year on year in the first quarter of 2012 – the first sub-8 percent print since mid-2009. Apart from the growing likelihood of an external shock, if investment falls, china is in serious trouble because the rest of the economy will need to grow twice as fast to compensate, and that isn’t a viable alternative in 2012. investment growth may decelerate, but a slump is unlikely. investment-toGDP ratios are still low across china, with sizeable capacity in the central and western regions.
Worryingly, around a quarter of the recent investment surge has siphoned to real estate. Since 2004, fixed asset investment in real estate has increased by over 20 percent per annum, leading to house prices doubling in 35 cities. Then, quite dramatically, investment in property peaked in 2010 – growing at 38 percent in 2010. The chinese Government has put in place a plethora of policy initiatives to engineer a deceleration of prices and siphon speculative forces from the sector. As a result, 15 (out of 37) cities saw month-on-month price declines in november. Looking ahead, prices will fall further as developers try to boost sales. china Vanke co. Ltd., the largest property developer in china, suffered a 36-percent year-on-year fall in sales during november– the fourth consecutive and largest fall so far in 2011. Looking further ahead, more restrictive regulations has forced many potential homebuyers out of the market, which adds another layer to demand, which is structurally underpinned by rapid urbanization, modernization and growing incomes. china has around 225 million urban households, but around 150 million homes. Another 100 million people will join cities over the next two decades. However, any miscalculation could result in anger. many homeowners have their life savings in the property, which are shrinking – especially in buildings where developers are offering steep discounts.
Credit Crunch
Small and medium-sized enterprises (SmEs) have faced the brunt of credit tightening. Typically small firms in the chinese mainland use retained earnings or private sources of capital to fund themselves. So, when cash flows were strained this year – in large part due to falling export orders and rising input costs –and credit conditions tightened, absent of established adequate credit lines, small firms were pushed to unsustainable sources of credit in the shadow banking sector. Private funding is estimated to be worth the equivalent of at least 20 percent of lending during the past two years. The surge of defaults in Wenzhou, east china’s Zhejiang Province, is just a start. Worse is to come as private lenders traditionally call their outstanding loans before the chinese new Year. The State council has already announced a few measures that will direct funding to SmEs.
The People’s Bank of china (PBoc) has already acted to support activity, cutting the reserve requirement ratio (RRR). inflation has fallen from a cyclical peak of 6.5 percent year on year in July, down to 4.2 percent year on year in november. in response, the PBoc announced a “pre-emptive” reduction to the RRR – by 50 basis points to 21 percent. The reduction is the first one in exactly three years, freeing 380 billion yuan ($60.3 billion) of bank capital. in 2012, headline inflation will average just below 4 percent, providing space for more reductions. The RRR will fall to 18.5 percent by the end of the first quarter of 2012 and interest rate cuts are not expected in 2012 but yuan appreciation will continue. The yuan/USD is on course to appreciate from 6.36 to 6 by the end of 2012, adding purchasing power to the nation.
China and Africa
Trade between china and Africa will surpass $155 billion in 2011. Since 2003, Sino-African trade has increased by nearly 500 percent. indeed, integration has been so swift that in 1990, no African countries had trade with china above 5 percent of GDP. Yet by 2008, near two dozen had. Plus, nearly two thirds of African nations list china as a top-five trade partner. And, unlike Africa’s trade with longstanding advanced nations, SinoAfrican trade proved resilient in the wake of the financial crisis.
Given china’s growing importance in Africa and china’s economic deceleration, fear mongering is growing, but misplaced. What really matters is that china’s economy is nearing $7 trillion. it is nearly twice the size of Germany and three times the size of the UK. Therefore, in absolute terms its contribution to global demand (even if its economy slows to 7 percent growth) is continually increasing, and that is what drives Sino-African trade and investment.
in 2012, china will still consume the most coal, copper, nickel, steel and tin in the world and second most oil and lead. it is true that the energy intensity of china’s GDP is declining, but the demand overhang does mean that china relies on imports of raw materials. Add growing food demand in china from the growing middle class (one only needs to look at pork prices in china to see the impact of changing diets), and Africa role is clear. currently, more than 60 percent of the planet’s available uncultivated cropland is in Sub-Saharan Africa, but only 3 percent is prepared for irrigation, compared with 40 percent in Asia. Sure, Africa is a long way from being a world bread basket, but in areas like coffee, tea, tobacco, cocoa, soybeans, fruit and so on, Africa will become increasingly important.
many of state-owned enterprises (SoEs) encouraged to “go out” have subsequently been successful in Africa, growing revenue streams through African operations and diversifying, to become independent engines. Future cash flows from projects here look favorable and as such are now looking to expand their presence on the continent.
it is also obvious that commercial ties have just started. The 2,000 or so chinese companies with operations in just 17 African nations in which Standard Bank is present and the 1 million chinese people in Africa obviously have a long-term agenda.
one thing that is clear - Africa is open to chinese investment and can serve as a pressure release for china’s excess capacity and create employment through infrastructure deals. Africa offers china investment alternatives (real assets) to dollar-denominated fixed income products which suits china’s desire to passively diversify its consistently accumulating foreign exchange reserves.
(The author is an economist with South Africa’ Standard Bank Group)