...in China, a slowdown, ‘not a meltdown’

Weak leading economic indicators for China prompted a sharp sell-off on the Shanghai stock market on Tuesday and dragged down markets in Asia and Europe, but some economists say China is only witnessing a “slowdown, not a meltdown”.

China’s “overheated economy” is “cooling off” under the impact of quantitative and micro tightening, “but this is just a slowdown to a more sustainable growth rate, not a meltdown,” says HSBC’s co-head of Asian economic research Qu Hongbin.

Leading economic indicators — from the Purchasers’ Manufacturing Index to industrial production data to growth in investment - have all been slowing over the past few months, but this, according to Qu, only implies that the “policy tightening” is working. “Be ready for lower readings of Chinese data in the coming weeks.”

UBS economist Wang Tao too points out that data from the past couple of months show that “economic growth is strong, but the momentum has peaked.”

Following the 11.9% year-on-year burst of growth in the first quarter of 2010, “we expect GDP growth to gradually decelerate to 8.5% y-o-y in the fourth quarter, with the annual average growth at about 10%, she adds.

Wang expects a “soft landing” in GDP growth, and “rising but modest” inflation. However, she reckons, “continued policy uncertainty”, including in the property sector, and the “decelerating sequential momentum” will weigh on the markets.

But what will be the growth drivers in China that will avert a hard landing of the economy?

HSBC’s Qu says that despite the slowing momentum of investment growth, urban fixed-asset investment will likely stay above 15% in the second half of 2010 and in 2011, and contribute about 6 percentage points to GDP growth.
That will, in his reckoning, be driven by an “acceleration in public housing construction”, which “should partially offset the slowdown in private property investment so as to avert a collapse in property investment.”

Additionally, continued investments in ongoing infrastructure projects “will provide a cushion” for the investment slowdown.  Deregulation of rules will also “lift” private investment in a range of industries. And private consumption growth, which has surprised on the upside this year, “will likely remain resilient” in the coming quarters, he adds.

“A substantial improvement in the labour market - both in terms of new job creation and wage increases - should underpin solid private consumption growth,” says Qu.

“Despite the anticipated correction in the property market, there will be limited balance-sheet effect on household consumption given the low leverage in Chinese households. As a result, despite external uncertainties, China will likely rely on domestic demand to grow 9% in the second half of 2010 and in 2011.”

Wang too expects to see “solid growth” of annual housing construction, driven by the push for urbanisation and public housing construction directed at the mass market. Bank lending too will grow in line with the government target - of 7.5 trillion yuan; and this would provide “adequate support” for growth, she adds.