A further slowdown in GDP growth in China and high levels of unemployment will affect the population's propensity to spend, meaning domestic consumption is unlikely to make up for falling exports.
As soon as it became apparent that the financial crisis was no temporary matter, the Chinese government was quick to put forward Rmb4 trillion ($585 billion) to bolster its economy. The latest data confirms that this support was necessary, but observers say it will take some time for the medicine to have an effect.
November was another bad month. Industrial production growth declined to 5.4% year-on-year, which is the lowest since early 2002, and the purchasing managers' index fell to 38.8%—a big reduction from October's 44.6%.
To some extent, much of this was expected as diminishing global demand was putting pressure on manufacturers. What is possibly more worrying is the slowdown in retail sales, because domestic consumption is generally seen to be a major factor that could make up for falling exports. In November, retail sales grew at 20.8% year-on-year, down from 22% in October. The growth in urban sales, which accounts for two-thirds of all retail sales in China, slowed by 1.8 percentage points to 20.3% month-on-month.
At the same time, November saw a slight decrease in fixed asset investment growth—26.8% in the period between January and November, compared to 27.2% in January to October.
In a recent note, Citi economists predict a further slowdown in GDP growth and high levels of unemployment in the cities, which will affect the income of individuals and their propensity to spend. The same note singles out department stores as a retailing area that is "likely to disappoint", while favouring an overweight position on supermarkets. "Falling food inflation could impart some downside risk to top line growth, but we believe supermarket operators are enjoying better earnings visibility into 2009."
Things are going to get worse before they get better, says Morgan Stanley in its 2009 China economics outlook. A drop in exports is only part of what the report describes as a "triple whammy"—there is also the depressed property sector, brought down by tough government policies introduced last year, and the massive levels of destocking.
Although the Morgan Stanley report says that this triumvirate of ills has most likely reached its peak, it will continue to be felt through the first half of next year, which will in turn lay the foundations for a strong recovery in 2010. The US investment bank's baseline scenario is for GDP to grow at 7.5% next year (versus 11.4% in 2007), on the assumption that declines in property sales and lower levels of exports will be balanced by infrastructure investment provoked by the stimulus package.
The downside risks relate to property. "If... real estate investment were to collapse and contract by 30% in 2009, the impact would be so big that even the fiscal stimulus package in its current form and size would not be able to make up for the growth shortfall, in our view," says the report. Under such circumstances, GDP growth could drop to 5%. Any potential upside depends very much on external factors. A growth rate of 9% is possible if the recession in China's key export markets turns out to be less bad than expected.
In the meantime, all we can do is wait until the stimulus package, much of which will be allocated towards infrastructure, starts stimulating. Jing Ulrich, head of China equities at J.P. Morgan, in a note predicts the package to start having an effect in the second quarter of 2009. Between now and then, expect more bad news to come, especially around Chinese New Year, when a poor set of corporate earnings is anticipated.