China: This Time Is Different As Li Visits Rust Bust, Stock Market Boom A Short-Term Solution

China premier says downward pressure on economy still increasing
Pressure on China's economy is increasing, and the country must prepare to face bigger economic difficulties, Premier Li Keqiang was reported as saying by Chinese state radio on Tuesday.

The comments came a day before the scheduled release of first-quarter GDP figures. Growth data is likely to show the economy grew at 7 percent in the first three months of the year compared to the corresponding 2014 period, a Reuters poll showed.

Li Keqiang also visited the region playing the largest role in China's economic slowdown: the industrial northeast. I covered Liaoning province last October: Liaoning Sounds Warning on Chinese Economy. The northeast is home to steel manufacturing, coal mining and heavy industry, all hit hard by the global drop in commodity prices driven by China's rebalancing. To make matters worse, oil and oil service companies also play a large role in the northeast, so they're no doubt experiencing a serious deterioration in Q1 GDP growth. Even worse is, in recent years provinces such as Liaoning shifted investment into real estate in order to generate GDP growth. Now that real estate is slowing and the higher stages of the economy are in recession, things are going from bad to worse in a hurry.

SCMP: China's premier warns worst-performing provinces to boost economic growth
Premier Li Keqiang has urged leaders of the northeastern provinces to meet their economic growth targets this year, after the region - the country's "rust belt" industrial base and home to 120 million people - registered the nation's worst performance last year.

The unusual rallying call by Li, during a tour last week to Changchun , capital of Jilin province, has raised speculation that first-quarter gross domestic product (GDP) figures, due on Wednesday, will show cooling growth in the national economy.

"The three northeastern provinces must guarantee their annual economic and social development targets are met smoothly," Li told provincial leaders, according to a government statement on Saturday.

"People's job security and improvements in income aren't castles in the air. They must be bolstered by a certain speed of economic development."
Whatever your estimate of GDP growth is for China, the northeast is worse. Real estate investment in Liaoning has been contracting at double digits for months (seven and counting as of February). If you have a low ball estimate of GDP growth around 3 to 4% or less, then these provinces are in either a full blown recession or what could be termed the early stages of a depression.
Liaoning, Jilin, and Heilongjiang registered GDP rises of 5.8 per cent, 6.5 per cent, and 5.6 per cent respectively last year, missing their annual targets. This put them among the five worst provinces on the mainland.

The national economy expanded 7.4 per cent in 2014, the slowest in 24 years.

Liaoning and Heilongjiang are targeting GDP growth of 6 per cent this year, while Jilin is aiming to maintain the same growth as last year.

The local economies are dominated by state-owned heavy-industry manufacturers with low efficiency and excess capacity. The government has ordered plants with outdated technology or polluting facilities to cut production.

"Problems do exist in the economic structure of the northeast. When the Daqing oilfield or [state-owned car manufacturer] FAW sneezes, Heilongjiang and Jilin get a cold," Li said, referring to the state giants that are backbones of local development.
As I argued previously, I do not believe the slowdown in the northeast will remain localized. The recession that is beginning in the higher (earlier) stages of production and it will eventually filter through the entire economy.

Liu Shan, deputy editor of the China Business Times, asks what's changed:
Cause the economy continues to decline is largely due to the ongoing restructuring. Chinese economic downturn, not just their own structural adjustment, is actually a step to adjust the structure of the global economy, if there is no adjustment in China's economic structure, there will not be a rebalancing of the world economy. This view, do not expect steady growth of exports. The latest import and export data show that exports fell again in March, a decline of nearly 15%, so that the roller coaster in the first quarter exports showed a rare sight.

Another important reason is that the economy continues to decline in investment appetite, mainly due to two things, one is real estate development and investment growth decline, which is the inevitable result of long-term real estate after the inflection point. The government is also through the release of a variety of favorable policies to encourage housing consumption, but this effect is limited, do not play a decisive role for steady growth. Regardless of how the Government rivalry, investors no longer recognized the investment value of real estate, and housing consumption warming fresh bag of tobacco effort may have passed. Housing to the inventory, the developer is still arduous task. Second, the government investment slowdown, economic factors are tight revenue, local government financing difficulties. Political factors also have an impact, collusion been suppressed, indirectly reducing local investment projects.

In both exports and investment problems, the consumer is unable to count on. Consumer expansion itself is the result of economic growth, income growth if not, how the consumer may be accelerated.
Therefore, in the short term, the troika are unable to move forward, the economic downturn is difficult to avoid.
The basic point is that the reforms are slow moving, but the economic slowdown is fast moving. The global economy cannot rebalance until China rebalances, so exports won't revive growth. Real estate investment is falling due to the build up of inventory, demographic shifts and a change in psychology. Housing rescue policies won't reverse the trend, only ease it. Government investment is falling too, constrained by falling land sales and the anti-corruption push. Without strong income growth, the consumer won't come to the rescue either.

The government will push harder with supply side reforms and monetary easing, the latter in part to push a wealth effect and SME financing via the booming stock market:
Therefore, the Prime Minister after the forum, the government will take measures as soon as steady growth, and come up with a set of complex tools, including tax cuts and other supply-side policies, but the core of the tool is to stimulate aggregate demand, firstly, to increase government investment in public projects, second cut the RRR.

Of course, the easing of monetary policy of quantitative easing is actually thinking that it continues to stimulate the stock market boom, on the one hand to increase direct financing and promoting small and medium enterprise development, science and technology; on the other hand to create wealth effect, stimulating consumer spending.

iFeng: 总理这次座谈会有何不同

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