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Monthly Emerging Asia Report: Peter Redward looks at China's hardening economic slowdown and explains why a 2008-style miracle rebound is unlikely this time around

Currencies
Monthly Emerging Asia Report: Peter Redward looks at China's hardening economic slowdown and explains why a 2008-style miracle rebound is unlikely this time around

Here's our monthly report on Emerging Asia with Redward Associates' Principal Peter Redward, including his views on the signs of a deepening economic slowdown in China and whether Beijing can repeat the miracle of 2008 and 2009 by stimulating growth. Redward says it will be much harder this time around for China to restimulate its economy as strongly as last time.

"We're seeing signs that the slowdown is deepening,"he said.

Most China economists had forecast a rebound coming into the second half of the year, which didn't appear to be happening.

"If anything, we sees signs of inventory accumulation, a slowdown in industrial activity and concerns about investment, which will feed back into weakening consumption growth," he said.

"The whole picture looks very soggy to us and we don't think it's driven by what's happening in Europe. We think it's predominantly domestically driven," he said, noting however any European slowdown would further slow the economy.

Redward said the Chinese government would find it difficult to repeat the very fast injection of capital spending into China's economy in late 2008 and early 2009 in response to the Lehman crisis, which helped support the rest of the Asian and Australasian regions through 2009 to 2011.

"They can provide some support for the economy. The policy they're adopting now they call 'fine tuning', which is a very gradualist adjustment to policy," he said.

"They're doing that because they believe the stimulus they engaged in (in 2008 and 2009) was too large and too risky, and they're now suffering from the hangover effects of the investment in terms of local government liabilities and bad debts in the banking sector."

Redward noted however there was a chance Beijing's policy makers would be more aggressive as it became clear that Chinese economists' predictions of a managed slowdown were not coming to fruition.

"We've been in a soft landing phase through till mid-April and since then it's definitely been getting harder," he said.

He noted however it would be difficult for China to have a proper 'hard landing' similar to the ones seen by other Emerging Asian economies during the Asian crisis of 1997. China had been running current account surpluses and had a lot of cash on bank balance sheets.

'Our worst nightmare'

"As China slows and demand for industrial goods and raw materials slow, that has very positive terms of trade effect for China," he said, pointing to the likely fall in such import prices for China, which would help cushion its economy.

"But of course from an Australian and New Zealand perspective that's our worst nightmare, where you get a slowdown in China coming through in the industrial sector, leading to a fall in commodity prices. It boosts their terms of trade at our terms of trade expense, and that's what's happening right now."

Redward said Beijing was likely to make announcements in coming weeks of apparent stimulus, but they were unlikely to have much of an effect.

"A lot of that will be pre-existing spending being announced for a psychological topup," he said, pointing observers instead to prices of commodity prices.

"Commodity prices are definitely the canary in the coal-mine."

Beijing and the provinces

Redward said he was concerned that provincial governments in China would change their behaviours in the wake of the Bo Xilai scandal, where the mayor of Chongxing was sacked after allegedly intervening to cover up an alleged murder of a British national by his wife. The sacking of Bo Xilai came amid in a once-in-a-decade political transition of China's top leadership, which many think is hampering its political response to the latest economic stress.

Provincial governments were now heavily indebted with reduced access to state government loans after a period of competitive expansions by local government politicians aiming for higher honours on the back of strong local growth.

"The problem now is you've got this political scandal going on. If you're a provincial governor, the last thing you want to do in an uncertain transitional leadership environment is to put yourself into a position where you stand out from the crowd."

"It's better to stay with the sheep than to risk running back. Even if Beijing pushes funds into the provincial governments and tries to get them to increase spending, they're not going to do it. They're going to be looking at their large local government financing vehicle debt and they're going to be saying it's best for us to park that off to one side in a little emergency tin to keep our cashflows going and keep the political risk low."

"That means you're not going to get the increased stimulus we had in 2008."

See more here about Redward Associates here, which produces Emerging Asia Today, a daily subscription newsletter.

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8 Comments

Only Reforms Can Revive Growth in China - Andy Xie

http://english.caixin.com/2012-05-17/100391214.html

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the economic winter is yet to hit Australasia, we've been in autumn for some time.

Winter is truly arriving now, with China slowing

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Except for landlords in Auckland - time to spring clean the yacht for them!

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I wouldn't be too bullish on housing - if the economy slides further then at some point that is going to feed back negatively into house prices

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NZ Heads....

Do I start my own personal bank run then or are the NZ banks safe enough to withstand the storm?

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I dont think NZ banks are safe enough, but then I dont think any are, not necessairly because of leverage etc but because all the banks are inter-linked and interdependant. So its possible say the EU freezes up and that freezes us...

I would suggest several bank accounts with different banks...make sure you can Internet bank/transfer decent sized sums between them.

Are there limits btw? I think you are limited to $700 cash out per day?

regards

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Oh come on now, we have been living with this sort chicken licken stuff for four years near enough.

NZ is in a sound enough position to weather what will be a bouncy ride for a bit as long as Bill English isn't allowed to hit the "austerity" panic button. Bill will be mad keen to get out the hair shirt for ordinary NZers as in the past.

 

 

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Meet the Man Who Controls More Money than Ben Bernanke BY DAN COLLINS 05/15/2012   If you thought the U.S., E.U., and Japan were the only central banks printing fiat currency think again. There is new player at the table and he controls more money than Ben Bernanke.   The People’s bank of China (PBoC), China’s central bank is now the 800lb panda in terms of balance sheets. They have become the main provider of global liquidity with its total assets topping 28 trillion yuan (about $4.5 trillion dollars). By comparison, the Federal Reserve’s balance sheet is a paltry $3.5 trillion dollars.   This makes the PBoC’s governor, Zhou Xiaochuan, in charge of the largest pool of money on earth. He is now controlling more money than Ben Bernake. These two combined are a global tag team of liquity spraying money all over the world’s economic system.     http://www.financialsense.com/contributors/dan-collins/man-who-controls-more-money-then-bernanke
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