China Economy's `Soft Landing' Roils Global Markets
China’s success in cooling its economy is alarming investors concerned that a slowdown in the engine of the global recovery may help trigger another recession.
Manufacturing expanded less than forecast in June, a survey of purchasing managers compiled by the National Bureau of Statistics showed today. The Conference Board two days ago lowered its April leading economic index reading, triggering a worldwide sell-off in stocks.
China’s growth is in the midst of a drop of more than 4 percentage points, a “good slowdown” that averts overheating, according to Goldman Sachs Group Inc. That outcome may unnerve investors when Europe is tightening budgets and the U.S. jobless rate remains near 10 percent; benchmark stock indexes from the U.S. to Japan this week hit their lowest levels this year.
“From the economics point of view, China’s economy is cooling towards a healthy soft landing,” said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. At the same time, “the uncertain global outlook makes pessimism easy to prevail” in financial markets, he said.
The Shanghai Composite Index closed 1 percent lower at 2,373.79, declining for a seventh day in the longest losing streak since 2008. The MSCI World Index was at 1,034.17 as of 4:13 p.m. in Hong Kong, its lowest level since August last year.
Gap With Government
Markets are demonstrating a disconnect with China’s policy makers, who have sought to rein in an economy that surged at an 11.9 percent annual pace in the first quarter. Regulators have tightened rules for property purchases in an effort to quell real-estate prices climbing at a rate in excess of 12 percent, and told banks to restrain lending after a record credit boom.
China’s economy is moving in the “expected direction,” Premier Wen Jiabao said in meetings with businesspeople and economists this week, according to a statement posted on the government’s website yesterday. Policy makers will “further cement and develop the positive economic trend” amid an “extremely complicated” domestic and global outlook, he said.
“There’s nothing new here,” as economists for months have been forecasting China to slow, said Sun Mingchun, an economist at Nomura Holdings Inc. in Hong Kong. “Something very bad must happen” to justify concern of a return to the slump of 2008-09, Sun said.
Growth in China will be sustained by infrastructure projects still under way resulting from the 4 trillion yuan ($589 billion) fiscal stimulus unveiled in November 2008, Sun said. The nation has 28.8 trillion yuan of unfinished projects in place, amounting to 85 percent of gross domestic product, he calculates. Sun estimates the expansion will ease to 10 percent.
Today’s purchasing manager index for China indicated manufacturing expanded at the slowest pace in 16 months, excluding a Lunar New Year-affected February 2010. The easing comes after a slide in property sales and erosion in the outlook for exports given the European crisis.
“I get the exit rate for Chinese GDP growth later this year at 8 to 9 percent on a worse-case basis,” Stephen Roach, Morgan Stanley’s Asia chairman, said in an interview with Bloomberg Television in Beijing yesterday. “That’s a much more sustainable outcome than the over-heated growth rate in the first quarter.”
What’s good for China may not be helpful to the immediate global economic outlook.
Nobel laureate Paul Krugman this week said the world may be in the midst of a global depression. Fitch Ratings said yesterday that renewed financial-market volatility and Europe’s sovereign debt woes increase the risk of a return to a recession. Spain’s AAA rating was put on review for a cut by Moody’s Investors Service yesterday.
“People are afraid that sovereign risks may be translated into financial institutions’ risks and credit contraction,” said Mitsushige Akino, who oversees $450 million at Tokyo-based Ichiyoshi Investment Management Co.
Goldman Sachs Asia economists, led by Michael Buchanan in Hong Kong, wrote in a note yesterday that while China’s property market will probably see a “relatively smooth” transition from residential to public housing construction, there are risks of a deeper slump.
“The temporary policy-driven slowdown could be offset subsequently by recalibration of policy,” such as through guidance to banks on lending, the Goldman economists wrote.
Prospects for higher wages may also bolster China’s domestic demand. At least nine Chinese provinces and cities will raise minimum wages from today by as much as a third. Beijing is increasing the lowest monthly salary employers may pay to 960 yuan from 800 yuan. Central China’s Henan, the nation’s most populous province, is raising its minimum wage by 33 percent to 600 yuan, the local government said on its website.
China may come under pressure to do more to support a recovery that Group of 20 leaders last month described as “uneven and fragile.”
One way would be through stronger calls for China to allow exchange-rate gains, which would make imported goods cheaper. Policy makers ended a fixed yuan peg to the dollar on June 19, and it’s risen 0.6 percent since then.
“They might like domestically to keep the currency where it is, but when the rest of the world is slowing down while China still has reasonably positive growth and export performance,” said Brian Jackson, an emerging-markets strategist in Hong Kong at Royal Bank of Canada. “The rest of the world would say: hey you guys need to do more.”
U.S. President Barack Obama yesterday reiterated his desire for a stronger yuan, days after citing “headwinds” from the European crisis. A Labor Department report tomorrow may show the country’s unemployment rate rose to 9.8 percent in June, according to the median estimate in a Bloomberg News survey.
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