Economic data, released from China in the form of PMI reports for June, give a further insight into the health of the country’s economy. One official and one conducted by HSBC point to a fairly subdued picture within the country’s manufacturing sector. Whilst official numbers indicated growth by the sector in June by the very narrowest of margins, the number from HSBC pointed to contraction and was in fact the weakest since September. Should these numbers be a surprise? Probably not, it was obviously unrealistic to expect the economy to continue to grow at the blistering rate of the previous decade. Nevertheless, some observers are starting to question whether the new Prime Minister may in fact be the first to miss the official economic growth target since 1998.
Go slow
In some respects, the new Government is actually deliberately pursuing policies that will slow the economy in the hope of setting out sounder foundations for growth in the future, as was recently demonstrated by its actions in the interbank markets. In an attempt to bring lending within the economy under control, the Government imposed the somewhat masochistic response of withdrawing liquidity, which had hugely adverse effects and led some to suggest this may be the country’s ‘Lehman Moment.’ Fortunately, there are two important reasons why such an outcome would be extremely unlikely: first, that the large Chinese banks are owned by the state anyway and second, that the crunch was instigated by the Central Bank. Having realized the threat to confidence, the Central Bank has quickly reversed course but it has sent a powerful message to the banking sector.
Structural flaws
The economy has seen credit rising much too fast and continues to see excesses within the housing sector. The problems are effectively structural flaws and would be solved by reform. The problem for the leadership is that such changes would likely be quite damaging in the short run; attempts to reign in lending, for example, will constrain growth. However, longer term changes within the banking system, such as the liberalisation of deposit interest rates, would allow the official banking sector to compete with the shadow banking sector and as such should draw funds away from the latter.
Risky moves
The Government is treading quite a dangerous line in the policies it is pursuing, as these effectively amount to tightening. However, such an approach reflects what appears to be an increasing appetite to push through further liberalisation of the economy. This is particularly the case in the banking sector but also with regard to the huge incumbent state owned enterprises and forcing greater private sector competition. This is clearly a brave move as there will be much ingrained self-interest, but if China is to grow in a sustainable and healthy manner then these changes are essential.
Long term focus
Hitting the official growth target of 7.5% this year increasingly looks a tall order but the leadership should focus on the long term. However, these actions have coincided with quite an uncertain time as global markets digest the possibility of a change with regard to Quantitative Easing, and as such pushing through these reforms at present may well prove quite tough. The official line seems increasingly suggestive of an economy that should not expect further stimulus, which if believed could lead to quite a challenging near term – not least because of the possible implications on social stability, and the need to meet the implicit contract which underpins the population’s tolerance of one party rule, namely adequate job growth. The importance of Chinese growth to the global economy should not be understated and clearly a marked change in short term fortunes would not be at all helpful to a still weak global economy. Nevertheless, it is probably still preferable to more profound challenges further along the line, were the country to skirt these issues.
