The global economy may no longer be able to rely on China to be the growth engine it’s been in the past.
On Monday, China’s official statistics agency announced the world’s second largest economy grew 7.5% in the second quarter as industrial production and fixed asset investment continued to dip.
While the slowdown came in line with analysts’ expectations, it presages further slowdowns, as China’s GDP will probably average 7.5% this year, falling to 6.9% next year, Nomura’s forecasts indicate, which given the size of China’s economy has important implications for global growth going forward.
No hard landing for China, but continued growth contraction for several quarters to come, Nomura’s fixed income research team said after reading through data released on Monday.
Growth domestic product slowed to 7.5% on a year-over-year basis, down from 7.7% in the first quarter, and will probably trend down in coming quarters, hitting 7.4% in Q3 and capping the year off at 7.2%.China’s new leadership is in a difficult place.
Under Premier Li Keqiang, policymakers are trying to move away from a credit-backed growth model, fostering domestic demand and value added exports to achieve a more sustainable economy.
They’ve stressed in repeated speeches their willingness to tolerate lower growth to achieve their goals, and acted on those words, clamping down on a shadow banking system on steroids, causing a dangerous liquidity squeeze that threatened to spill over to the broader economy.
The several factors that make up China’s economy all suggest the growth slowdown is relatively broad. Industrial production growth dipped to 8.9% year-over-year in June, from 9.2% in May, coming in below expectations, as did fixed asset investment (which ticked down to 20.1% from 20.4% in May.
Investment growth in the manufacturing sector continued to slow, hitting 17.1% year-to-date, compared with 17.8% in May, while real estate investment growth slowed to 20.3% from 20.6% previously.
At the same time, the Communist Party of China seems to be comfortable with the pace of economic cooling. According to Nomura, they will tolerate slower growth as long as they hit their 7.5% target for the year, which should lead them to keep monetary policy tight for the remainder of this year and into 2014.
China’s footstep has become increasingly important for the global economy, as it’s grown in size and share. China is now responsible for about 13% of global economic activity, compared to 5% in 2006 according to the WSJ.
As growth has slowed, so has its surging demand for commodities and other key products. Indeed, shares in major international firms with exposure to China, including Caterpillar CAT +0.59% and Rio Tinto RIO +3.26%, have lagged the iShares China ETF over the past two and five years, despite tracking its movements.
Others, like Starbucks SBUX -0.46% and Yum, have excelled, but have taken big hits when reporting weakness in China.
There are plausible reasons to expect the Chinese slowdown to continue, according to Nomura which is relatively bearish and puts the probability of sub-7% growth at 30% in the second half of 2013. They expect the government to lower their growth target for 2014 to 7% for 2014 as they pursue quality economic growth that is also sustainable.
Nomura’s analysts also believe China has entered a prolonged period of deleveraging which should last well into 2014 as the government cracks down on the excesses of the financial system (this self-imposed financial tightening is extremely dangerous, as I’ve previously explained).
Finally, potential growth continues to slow, with the size of the working age population falling for the first time in years, and probably continue to tick down, and progress on structural reforms occurring very slowly.
China’s economic growth over the past few decades has been stellar. Not only did China help carry the global economy during the recent financial crisis, along with its emerging market peers, but it has continued to deliver some of the strongest GDP numbers out of nation.
Potential remains incredible, particularly as a middle class begins to emerge and consume. Yet the global economy will have to recalibrate and learn to deal with a new China, one that isn’t firing on all cylinders at all times and in every direction.
Monday’s GDP numbers are but one more sign of this, and investors should remain cautious as risks and shocks, particularly given leverage in the shadow banking system, remain large.
forbes.com
On Monday, China’s official statistics agency announced the world’s second largest economy grew 7.5% in the second quarter as industrial production and fixed asset investment continued to dip.
While the slowdown came in line with analysts’ expectations, it presages further slowdowns, as China’s GDP will probably average 7.5% this year, falling to 6.9% next year, Nomura’s forecasts indicate, which given the size of China’s economy has important implications for global growth going forward.
No hard landing for China, but continued growth contraction for several quarters to come, Nomura’s fixed income research team said after reading through data released on Monday.
Growth domestic product slowed to 7.5% on a year-over-year basis, down from 7.7% in the first quarter, and will probably trend down in coming quarters, hitting 7.4% in Q3 and capping the year off at 7.2%.China’s new leadership is in a difficult place.
Under Premier Li Keqiang, policymakers are trying to move away from a credit-backed growth model, fostering domestic demand and value added exports to achieve a more sustainable economy.
They’ve stressed in repeated speeches their willingness to tolerate lower growth to achieve their goals, and acted on those words, clamping down on a shadow banking system on steroids, causing a dangerous liquidity squeeze that threatened to spill over to the broader economy.
The several factors that make up China’s economy all suggest the growth slowdown is relatively broad. Industrial production growth dipped to 8.9% year-over-year in June, from 9.2% in May, coming in below expectations, as did fixed asset investment (which ticked down to 20.1% from 20.4% in May.
Investment growth in the manufacturing sector continued to slow, hitting 17.1% year-to-date, compared with 17.8% in May, while real estate investment growth slowed to 20.3% from 20.6% previously.
At the same time, the Communist Party of China seems to be comfortable with the pace of economic cooling. According to Nomura, they will tolerate slower growth as long as they hit their 7.5% target for the year, which should lead them to keep monetary policy tight for the remainder of this year and into 2014.
China’s footstep has become increasingly important for the global economy, as it’s grown in size and share. China is now responsible for about 13% of global economic activity, compared to 5% in 2006 according to the WSJ.
As growth has slowed, so has its surging demand for commodities and other key products. Indeed, shares in major international firms with exposure to China, including Caterpillar CAT +0.59% and Rio Tinto RIO +3.26%, have lagged the iShares China ETF over the past two and five years, despite tracking its movements.
Others, like Starbucks SBUX -0.46% and Yum, have excelled, but have taken big hits when reporting weakness in China.
There are plausible reasons to expect the Chinese slowdown to continue, according to Nomura which is relatively bearish and puts the probability of sub-7% growth at 30% in the second half of 2013. They expect the government to lower their growth target for 2014 to 7% for 2014 as they pursue quality economic growth that is also sustainable.
Nomura’s analysts also believe China has entered a prolonged period of deleveraging which should last well into 2014 as the government cracks down on the excesses of the financial system (this self-imposed financial tightening is extremely dangerous, as I’ve previously explained).
Finally, potential growth continues to slow, with the size of the working age population falling for the first time in years, and probably continue to tick down, and progress on structural reforms occurring very slowly.
China’s economic growth over the past few decades has been stellar. Not only did China help carry the global economy during the recent financial crisis, along with its emerging market peers, but it has continued to deliver some of the strongest GDP numbers out of nation.
Potential remains incredible, particularly as a middle class begins to emerge and consume. Yet the global economy will have to recalibrate and learn to deal with a new China, one that isn’t firing on all cylinders at all times and in every direction.
Monday’s GDP numbers are but one more sign of this, and investors should remain cautious as risks and shocks, particularly given leverage in the shadow banking system, remain large.
forbes.com
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