If you believe that the Chinese economy grew at the rate of 6.8% in the December quarter, you’ll believe anything.
It might have, but the idea that the Chinese statistical bureau can accurately measure the size of the national output in three weeks is laughable. The figure of 6.8% probably has more to do with the fact that it exactly matches the median estimate of 12 economists surveyed by Bloomberg.
That said, China’s economy is clearly slowing rapidly. On some measures it is going backwards – for example, electricity production is falling; so is steel production and motor vehicle production.
Citigroup’s Shanghai-based economist, Ken Peng, estimates that after seasonal adjustment, China’s real GDP growth in the December quarter was -0.3% annualised – the first contraction in at least 16 years.
Moreover, China’s 2007 problem with inflation has very quickly turned into a problem with deflation; the December quarter was the third consecutive quarter of a falling CPI. Although food prices went up, the declines in other prices accelerated. Ken Peng expects 0.5% deflation for the year.
In general, China is no longer anyone’s saviour – not Australia’s and not the rest of Asia.
With the benefit of hindsight, China’s decision in early 2007 to slow its overheating economy through interest rate hikes and credit restrictions on the banks was poorly timed. Even as they did it, the global financial tsunami was rumbling across the Pacific.
The result is that China is facing two recessions; domestic consumption and investment, and exports. It is a story being repeated across Asia.
The collapse in Asian exports at the end of last year, especially in Taiwan, Korea and Singapore, was astonishing – falls of up to 40% year-on-year.
And although China’s exports are now also falling, its contraction appears to be mostly focused on a reversal of the private investment boom and a cutback in inventories, and the cause of the decline dates back to its own attempts to control inflation with monetary policy in 2007 and early 2008.
The good news is first that the banks are already nationalised, and second that the Chinese Government still dominates the economy (even though it owns a bit less of it than under Mao) and is rich.
In fact, throughout Asia the banks have so far been doing pretty well. ANZ’s chief Asian economist, Peter Guenwald, reports that Asia’s share of the total global bank write-downs of $US1 trillion announced so far is around 3%, and has been stable at that percentage from the start of the crisis. And most of those write-downs are in Japan.
So at least Asia does not have a banking crisis to add to the decline in exports and investment.
Indeed, Gruenwald says new loans by the state-owned Chinese banks increased 62% in December after the Government dropped lending quotas as part of its economic stimulus package.
But although there is much else the Government can do to stimulate the economy on top of the massive package announced last year, the big danger is that it will also turn to the exchange rate and depreciate the yuan to boost exports.
President Barack Obama’s nominee for treasury secretary, Tim Geithner, has already said that the new administration believes China is “manipulating” its currency (he means it’s a devaluer).
There is growing speculation that China is moving towards another devaluation to help exports.
And America has a new President who seems to be positioning himself to confront China over its exchange rate policy.
This adds a new and very dangerous element to the financial crisis.
This article first appeared on Business Spectator