Here's our monthly report on Emerging Asia with Redward Associates' Principal Peter Redward, including his views on the latest signs of an economic slowdown in China and a look at what China's authorities might do with exchange rates and monetary policy in response.
We started by talking about China's decision last week to cut its growth target to 7.5% from 8%, which Redward said was symptomatic of the underlying slowdown in economic growth to around 8-8.5% this year.
"The latest figures are definitely in line with a soft landing scenario," Redward said, pointing to industrial annual production growth of 11-12% and fixed asset investment growth of 20-21%.
"The numbers are still pretty good in general. There are signs they are slowing, but there isn't sign at this stage of clear stress," he said.
Redward agreed there was some evidence of over-building in China's housing market and that prices were too high.
"In some areas and in some markets that is definitely true," he said, referring to the high premiums charged for some high end condominiums.
"But the reality is, firstly, the urbanisation process in China still has a long way to run with only about 50% of people living in urbanised areas," he said.
"Secondly, the quality of the housing stock is still by Western standards extremely low and there is a lot of need for people to upgrade their housing."
Trade figures
Referring to figures showing a trade deficit for China in the first two months of 2012, Redward said the deficit of around US$4.5 billion for January and February was not that much higher on the same two months a year ago.
He said trade was dragging only modestly on China's growth, and China's current account balance was more supportive than some had suggested.
January's trade figures were also affected by the effects of China's Lunar New Year celebrations, Redward said.
A slowdown in Chinese exports to Europe was a cause for concern, but a sudden drop in fixed investment and domestic demand inside China would be a bigger worry, given this would then lead to a drop in demand for imports from the likes of Australia and New Zealand. This would be consistent with a 'hard landing.'
"Ironically that would involve the trade surplus surging and the net contribution from trade actually picking up very strongly, but it would also involve from our point of view Down Under a very substantial fall in commodity prices."
Chinese monetary policy
Redward said China's policy makers were concerned about any appreciation of the Renminbi, but there had not been a major change in policy towards a weaker currency. Some news outlets reported this week China had moved to stop the renminbi appreciating with a significant shift lower in the daily fix.
"The reality is the currency is going to provide only a very minimal impact on growth in China. The elasticity of demand for Chinese goods is not particularly strong to the currency effect," he said.
"It's likely that it's actually related to the internationalisation of the renminbi, in particular band widening. They didn't want spot/dollar/china to drop suddenly so rather than announcing a band widening, which would have seen dollar/china move to the bottom of the new band, they pushed the fixing rate up and that allowed them the headroom to adjust the currency band at some future point."
Reuters reported earlier today that China would speed up economic reforms and move to let its currency float more freely.
Debate about soft or hard landing
Redward said observers watching China should look for the early indicators in the markets for commodity prices and stock prices. There remained a risk of a hard landing, he said.
He said China was likely to increase its reliance on monetary policy easing through allowing more liquidity in the inter-bank market that would allow the 7 day repo fixing rate to drop, providing more capital at a lower cost to businesess and households.
The Indian economy was also slowing and there was a risk the Reserve Bank there could cut rates on Thursday, he said.
See more here about Redward Associates here, which produces Emerging Asia Today, a daily subscription newsletter.
No chart with that title exists.
7 Comments
No point praying, Matt. That won't change what is or isn't.
The physics says this won't happen:
"the urbanisation process in China still has a long way to run with only about 50% of people living in urbanised areas," he said.
"Secondly, the quality of the housing stock is still by Western standards extremely low and there is a lot of need for people to upgrade their housing."
What they are sympomatic of is the rate at which we are running into the wall. It amazes me that even now, there are folk operating on a faith/hope/denial basis. Murphy despairs the same thing:
http://physics.ucsd.edu/do-the-math/2012/02/the-way-is-shut/
"...... Malthus will ultimately be proven right that growth collides with finite resources so that growth must stop. His timing was off because he did not see fossil fuels coming, and I could likewise be accused of not seeing the next big wave of energy that will wash over us and “kick the ladder” of fossil fuels out from under us—a compelling notion, to be sure. But mathematical and thermodynamic arguments alone portend the end of growth in a finite system. Scientists will not disagree".
And therin (as the bard's would tell us) lies the rub. We have time to act, how much time is a known unknown. Have you posted any links detailing your own system PDK? Curious whether or not you have a lawn. When I build my own place there will be no lawn, mostly because I view them as both a time and energy waster. I'm still a couple of years away from building my own place though, and I'm looking for some ideas. What works etc.
On China, I think they are investing more in a post oil society then most countries. Hence they are overbuilding now, anticipating tougher conditions ahead. World leaders in wind, and solar power, and the only country building nuclear. Stockpiling energy intensive resources copper, iron, RRE etc.
Lawn? I'm more worried abour law'n'order. :)
We have a small postage-stamp by the house, which I can easily deal with using the push-mower. In the orchard areas, we're growing herb/wildflower clusters round each tree (brings the bees, smothers the grass, still lets you get to the tree) and things like redcurrants in clumps in between.
Small is beautiful, if you're starting. If you don't have it, it won't break down. Our bottom line is the year we spent sailing as a young family. Two hulls each 7 metres long, 1 metre wide (at the widest) and 1.2 tall (sitting headroom only. It had one 20-watt solar panel, plus the charging-loop on the OB. Not only did we survive, it was the agreed best year we ever did as a family.
You're welcome to come / stay/ talk/question before you make a move. I'm happy to talk about the blind alleys we went down too - it's all a learning process.
Good fun, but!
Reallocation of the consumption of finite resources?
Surely that defines when you grow, and when you shrink.
What goes up, must come down
What must rise, must fall
And what goes on in your life
Is writing on the wall
If all things must fall
Why build a miracle at all
If all things must pass
Even a miracle won't last
What goes up, must come down
What must stand alone?
Good old Alan Parsons. I suspect he understood what a gaussian curve looked like.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.