October 04, 2011
CHINA is in the midst of an unprecedented credit crunch that is hitting the country's private businesses and stoking fears of a sharp downturn in growth.
The government-mandated credit tightening is contributing to a slowdown in the Chinese economy, with an increasing number of forecasters predicting a sharp fall-off in the country's gross domestic product growth in coming years.
"Credit is being re-regulated and tightened through a broad set of policies aimed as much at preventing bigger asset quality problems in the wake of the 2008-09 credit boom as reining in inflation," Morgan Stanley analysts, led by Viktor Hjort, said in a client note.
"Such policy is probably prudent, but makes for a challenging credit environment . . . against an uncertain global outlook."
While Beijing still has policy firepower at its disposal, it is not immune from a rapid slowdown in Europe and US, as more prominent economist assess that the Atlantic zone has already slipped into recession.
Chinese authorities said last week the country's GDP, which grew at 9.5 per cent in the second quarter was on track to top 9 per cent this year -- down from 10.4 per cent last year. But the longer-term prognosis is becoming cloudier and the spread of opinion on the rate of future growth is widening.
In a quarterly poll by Bloomberg of investors, analysts and traders, released at the weekend, 59 per cent said China's GDP would be growing by less than 5 per cent annually by 2016. Of the respondents 47 per cent said this would occur in two to five years, with 12 per cent predicting such the slowdown within a year.
Yet China's closely watched Purchasing Managers' Index (PMI) continued its slow rise in September, hitting 51.2 per cent, up from 50.9 per cent in August.
"Economic development is continuing to stabilise -- worries of a hard economic landing are being eased," state-run Xinhua said.
"However, sub-indices of the PMI also show that uncertainties remain in the export sector and prospects for small and mid-sized enterprises are gloomy."
The Chinese sharemarket has continued to underperform global markets, with the Shanghai Composite Index down 15 per cent this year, compared with an 8.5 per cent drop in the Standard & Poor's 500 Index and a 12.3 per cent fall in the MSCI World Index.
Still, underpinning all the commentary about China's economy is a rising concern about the reliability of the country's headline economic statistics, particularly GDP and inflation.
China has a much larger black or grey economy -- economic activity based on untaxed cash transactions not recorded in official statistics -- than the world's other big economies.
Leading Chinese economic professor Gu Haibing wrote recently that the "hidden economy" in China is worth up to 6 trillion yuan ($974 billion), including all unregistered underground businesses such as gambling, the sex industry, unregistered factories, and street markets. China's GDP in 2010 was 36 trillion yuan.
There has been widespread concern about the effect of a significant downturn or return to recession in Europe and/or the US on China's export-driven model, which saw $US230 billion ($238.6bn) wiped off the value of the export sector in the 2008 downturn.
"External demand has weakened a little, but with the latest official exports growth number still rising at over 20 per cent year-on-year, the impact is not yet significant," HSBC Research Co-Head Qu Hongbin said. "Although we expect exports growth to moderate further in the coming months due to weakening external demand, provided the US and European economies do not both enter a simultaneous recession, we do not expect a severe dip on the scale of the 2008-09 downturn."
Morgan Stanley Asia chairman Stephen Roach believes that China's looming slowdown will be both manageable and welcome.
"Fears of a hard landing are overblown," Mr Roach said in comment piece released at the weekend.
"(But) there are now major questions about the sustenance of China's long powerful export-led growth model.
"Accordingly, China has no choice but to move quickly to implement the pro-consumption initiatives of its recently enacted 12th Five-Year Plan. Strategic transition is what modern China is all about."
China's next quarterly data will be released on October 18.
Article by Michael Sainsbury From:The Australian