Bare Talk had laid out the medium-term case for Asian decoupling. The two most exciting nations with economic and financial market prospects in Asia are China and India. China tops the world charts in stock market performance this year with at least 20% return for the Shanghai Composite Index. Brazil is not too far behind. Russia brings up the laggards. India is stuck somewhere in the middle but in negative territory. Bric nations are diverging. Will China be able to sustain the performance? Paint Bare Talk sceptical partly because it missed it.
Consensus forecasts still call for 8% real GDP growth in China this year. Very few estimates are below that number. Many of the forecasters are ready to pounce on any stray evidence of optimism to buttress their claim that China’s economy both slowed and bottomed out in the fourth quarter of last year. For good measure, they add that stimulus measures may have already started to work because in a command economy, the government commands and the economy obliges.
The same command economy did not prevent inflation from running amok in China not so long ago. It is inconceivable that the government would not have wished for lower inflation rates in the first half of 2008. It did not get it. The central bank had to raise reserve requirements and interest rates before inflation came under control. Therefore, the combination of fiscal stimulus and command economy is neither necessary nor sufficient for an economic recovery.
Optimists cite two recent data points in support of their forecast. One is that bank lending in the first three weeks of January is estimated at RMB1.2-1.3 trillion—one-fourth of all the lending that took place in 2008. Credit Suisse’s Dong Tao reckons that this surge in lending bolsters the chances of growth hitting 8-9% this year. Yet, he is concerned if such a surge in lending is either desirable or sustainable.
According to Stephen Green of Standard Chartered Bank, Angus Maddison and Harry Wu have re-estimated the entire post-reform Communist era growth rate to be at 7.9%, in contrast to the official rate of 9.6%. They estimated GDP growth in 1998 to be zero.
The second reason for optimism comes from the rebound in the China Purchasing Managers’ Index (PMI). Stephen Green points out that firstly, the index is still contracting and, secondly, the bulk of the response comes from the public sector. Another PMI calculated by CLSA showed that the index was still contracting in January with not much change from December readings.
Brad Setser looks at China through the optics of trade. What he sees has him worried. Exports by Korea and Taiwan to China are dropping at an accelerated pace. They are the first ones to report export figures for January. China’s statistics show that its imports from Australia, too, are declining, whereas Australia’s statistics (measured in the same currency) show that its exports to China rebounded in December.
On top of these caveats are recent indications of significantly larger than expected rural unemployment and severe drought. According to China’s agriculture ministry, nearly 20 million rural workers (15.3% of the estimated 130 million migrant workers) have lost their jobs and returned home. This is double the estimate from just five weeks ago. On top of this, the country has raised a “level II” emergency “warning of a severe drought rarely seen in history”, according to the People’s Daily, as cited in a Financial Times news report.
But, one has to concede that China has scope to run a much larger and more effective expansionary fiscal policy. Of course, China has large unseen and contingent fiscal liabilities. But we should not forget that many countries around the world are in a similar state. For instance, India has both a large contingent and above-the-line fiscal deficit, not to mention a high public debt stock. India’s external debt, too, is larger than that of China.
Barring a larger and persistent negative global demand shock (not an altogether remote possibility) and domestic social unrest, China has the option to turn the global crisis into a win-win-win proposition, as David Dollar of the World Bank writes in his blog. He points out in the understated language that is understandable, coming from an international institution, that China’s fiscal stimulus has considerable scope for improvement in boosting domestic private consumption.
Even a modest revaluation of the yuan would boost China’s image, clout and domestic purchasing power all at once, with acceptable long-run costs. That would also be the right thing to do, globally. Surplus-saving countries boost spending and deficit countries devalue and export their way to recovery.
Putting all together, investors are better off waiting for confirmation of an economic turnaround rather than jump right into the market. For all we know, it might well be a bear market rally that does occur every once in a while in a pathos-laden drama.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer and Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at email@example.com