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."

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