China’s path to steady growth
According to the latest government data, China’s economy was 8.1 per cent bigger in the first quarter of 2012 than during the same period last year.
While this is good when compared to the economies of the developed world, it is in fact the slowest headline pace for China in almost three years, and less than the 8.4 per cent forecast by market analysts.
Managers, economists and analysts have said that it has been difficult to evaluate Chinese economic data recently because of distortions related to Chinese New Year.
However, the Organisation for Economic Co-operation and Development’s leading economic indicators were recently revised to show a strong pick up from the lows last summer.
Combined with strong new loans figures and the improving global backdrop, this suggests economic growth is unlikely to be as weak as many had feared.
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, says: “Inflation is peaking and, if past monetary relationships hold, China could be in deflation by year end.
“With one eye on the upcoming leadership transition, policymakers could soon replace easing at the margins with outright stimulus. This would benefit global growth plays like commodities, the emerging markets and the Aussie dollar, which have all lagged lately on concerns that China is heading for a hard landing. The pick up in global growth should boost Chinese exports over the next two quarters.
“To stick with a hard-landing view, you have to argue either that the authorities are powerless to stimulate the economy or that global growth is collapsing. Neither seems a sensible base case.”
However, Chia-Liang Lian, manager of the Legg Mason Western Asset Asian Opportunities fund, argues that the current slowdown in economic momentum was expected by Beijing’s ministers, as it reflected the lagged effects of Chinese policy tightening over the past two years.
“In spite of some market worries of a Chinese hard landing, our sense is that the authorities remain unperturbed and in fact welcome the growth moderation currently underway. Discussions on hard-versus-soft landing run into the issue of definitions.
“We would argue that the current ‘not too hot, not too cold’ macroeconomic backdrop actually facilitates Beijing’s focus on longer term economic reforms, emphasising that reform efforts are the only way to ensure China’s growth sustainability over the medium-to-long term.
“There is ample ammunition to cushion any fallout from exogenous pressure. Unlike many developed nations, China has both the willingness and ability to engineer policy easing. That said, unless GDP growth falls significantly below the 7 per cent level, massive macroeconomic stimulus programmes, like the one undertaken at the end of 2008 shortly after the Lehman [Brothers] collapse, appear unlikely for now.”