Yet Another China Growth Downgrade

A worker cleans windows at an Apple store in Shanghai Photograph by Tomohiro Ohsumi/Bloomberg

Another week, another downgrade as pessimism spreads about China’s economic prospects. This time it’s UBS Securities, which cut its 2013 forecast for gross domestic product expansion from 8 percent to 7.7 percent. “Increasingly evidence suggests that growth will be weaker than we previously envisaged,” writes Tao Wang, UBS’s chief China economist, in a May 21 note.

The UBS move follows similar steps by Goldman Sachs, JPMorgan, Royal Bank of Scotland, the World Bank, and the International Monetary Fund, all of which have pared back predictions for China’s economy in recent months. The new forecasts for the year have ranged from 7.6 percent to 7.8 percent for the investment banks up to to 8 percent for the IMF and 8.3 percent for the World Bank. Most recently, Standard Chartered cut its forecast, from 8.3 percent to 7.7 percent,Standard Chartered on May 10.

What’s got everyone worried? For one thing, unexpectedly weak consumption. That’s likely due to anemic wage growth, plus Beijing’s ongoing crackdown on conspicuous consumption that has hurt purchases of high-end goods, according to both UBS and Standard Chartered. Lackluster exports, which many believe are already seriously overstated in the official figures, factor into the downgrades, too. Also alarming: a flood of new money, both from Chinese banks and fast-growing shadow finance, has done little to boost GDP growth.

One likely explanation, although hardly reassuring: “Some new borrowing has been used to finance interest payment of old debt by distressed local government entities and corporate,” while “companies are not willing to invest in the real economy given excess capacity in many sectors, entrance barriers in some others, and uncertainties related to fiscal and factor price reforms,” Wang writes.

“The bad credit problem may be a lot worse than we imagine,” writes Stephen Green, chief China economist at Standard Chartered in a May 10 note. He questions how official figures for non-performing loans have stayed below 1 percent, where in a “typical emerging-market credit cycle” bad loans would reach a high of 5 percent to 8 percent. “If actual NPLs are higher, then the new loan data could be disguising interest being added to principal on problematic loans,” writes Green.

Wang, at least, is not expecting as challenging a slowdown for China as the one it confronted some 15 years ago, when official GDP growth in 1999 dipped to a 7.6 percent annual low. “The current situation has a lot in common with that in the late 1990s, but also great differences. The excess capacity issues and the bad debt problems are less severe and corporate financial health less strained,” she writes.

“Consequently, the closures or restructure of excess capacity should have less of a negative impact on the economy and on the labour market. The amount of bad debt that needs to be written off, and hence the impact on the financial system, should also be relatively smaller than before. Importantly, the improved household financial health and better social safety net mean that household consumption should also be less affected,” writes Wang.

Before it's here, it's on the Bloomberg Terminal.