The Chinese economy

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Hard Landing? China Is Already There: Economist

Never mind the official data, China is already experiencing a hard landing, and there is no ‘silver bullet’ solution to the country’s economic problems, according to China bear Patrick Chovanec.

CNBC,

9 August, 2012

Chovanec, Associate Professor at Tsinghua University’s School of Economics and Management, told CNBC on Thursday that China’s economy is, in reality, probably growing at about 4 to 5 percent right now, hampered by a serious slowdown in investment by key industries.

China’s economy grew 7.6 percent in the second quarter and it wasn’t too long ago that it enjoyed double-digit growth rates.

"I think we are in a hard landing because, putting aside some of the official data, if you look at the numbers that are coming out on the micro level, the profit warnings are already higher than the levels that we saw in early 2009,” Chovanec said on CNBC Asia's "Squawk Box," referring to the global financial crisis.

“There are certain key industries that we can look to – steel, construction and equipment manufacturing – that are clearly in contraction right now,” he added.

Suning, China's top home appliance retailer, and ZTE, a major maker of telecoms equipment, have both warned that profit for the first half of this year will fall by 30 percent and 80 percent, respectively.

Economic data on Thursday meanwhile provide further signs that perhaps China’s economy is slowing more quickly than anticipated.

Annual growth in China's factory output slowed to 9.2 percent in July,the weakest in just over three years and below market expectations of a 9.8 percent increase. Retail sales rose 13.1 percent from a year ago, missing forecasts for a 13.7 percent rise.

China has slashed reserve requirement ratios (RRR) for banks three times since November and cut interest rates twice this year to bolster an economy that has slowed for six consecutive quarters.

“There's no easy silver-bullet solutions in the form of stimulus,” he said. “The People’s Bank of China has a lot of imperfect tools. You've got interest rates which are way below what a market rate would be. If you lower those rates, you would end up channeling more financing into over-investment as opposed to really rebalancing the economy.”

Time for More Monetary Easing?

Now that July’s numbers have come in weaker than forecast, economists say the need for another cut to the RRR, or possibly interest rates, has increased.

"This was the month when the stimulus was meant to bite. It didn't," said Alistair Thornton, an economist at IHS Global Insight, referring to the July data.

"In fact, poor macro data signals that the authorities continue to struggle in reviving growth," he added. "New projects have been approved, local governments have been given the all-clear to re-engage with financing platforms, and banks have been leant on to extend additional credit. By all rights, this should be feeding into heightened investment activity. It isn't."

The Chinese government would need to transform its current "stimulus push into a stimulus punch" and encourage "significant" investment activity throughout the country, he added.

Ding Shuang, an economist at Citi, agreed that the time was ripe for Beijing to take action to boost the slowing economy.

“Industrial production is quite sluggish, I think the bottoming out process is not completely over,” Shuang told CNBC. “The message is: policy support is still needed. I think the argument has strengthened for a step up in policy but not major stimulus, and sooner rather than later.”

However, Ding is not overly concerned about the Chinese economy and expects industrial production will pick up “very marginally in August and September as the RRR and interest-rate cuts take effect.”

Zhiwei Zhang, Chief China Economist of Nomura, agrees. Stimulus measures take time to work their way through the system, he added, maintaining his view that GDP growth in the third quarter will be better than the 7.6 percent posted in the second quarter.

He expects further monetary easing via a reduction in RRR in the third quarter.