Today, Thursday, the Chinese government released statistics showing that the country's economy grew at at an annualized rate of 6.8%, the slowest pace in seven years, during the last quarter of 2008. The performance follows a Fitch Ratings estimate at the end of last week that full-year 2009 growth would fall to 6% or below. The World Bank continues to insist on a 7.5% growth rate for the current year, based on the increasingly doubtful assumption of growing domestic demand. The International Monetary Fund has bruited a possible growth rate of 5%. Other estimates are being revised downwards, some even into negative territory.
It has generally been agreed that the economy needs a minimum 8% growth rate to maintain levels of production sufficient to prevent unemployment (and attendant social unrest) from increasing. Current revisions of estimates are falling too far below that level for the difference to be trivial.
These new statistics for the last quarter of 2008 follow a previous report of decline in China's gross domestic product during the third quarter to 9%, making now six consecutive quarters of decline, even following a new revision of figures for 2007 raising the growth rate from 11.9% to 13%.
Neither the organizational management nor the statistical methodologies of China's National Bureau of Statistics are immune from political pressure from above and the desire of their underlings to inflate numbers. It appears that there is a politically driven bias also in favor of smoothing curves, that is, artificially removing the fits and starts and jumps and spikes that are characteristic of actual economic life.
Observers and analysts have therefore sought other indirect economic measures of economic growth. Most of these (statistics such as electricity production, construction and industrial production, as well as fixed investment
and retail sales) show no significant increase in the rate of growth.
Thus manufacturing has been declining for at least five months across nearly every industry surveyed, although indirect statistics suggest that this decline may be stabilizing at least in the short term. However, export orders, output and new orders are all down. Companies are trying to protect market share by cutting prices. This reduces the benefits that could accrue from producers' lower costs, even as companies stop recruiting new personnel and let current staff go.
However, neither the Hang Seng China Enterprises (HSCE) Index for shares of mainland companies listed in Hong Kong nor the Shanghai A-Share Stock Price Index, sometimes called the Shanghai Stock Exchange Composite (SSEC), reacted much to the bad news, posting small gains.
It is worthwhile sometimes to compare the two benchmarks. The first is a freefloat capitalization-weighted index that includes H-Shares on the Hong Kong Stock Exchange and is part of the Hang Seng Mainland Composite Index, while the second is a capitalization-weighted index following Shanghai Stock Exchange A-shares that are restricted to local investors and qualified institutional foreign investors.
The HSCE is in general more exuberant. It has held up much better than the SSEC from the late 2007 highs, particularly from mid-March to mid-September 2008. It also has done much since the late-October trough last year, although that is largely because its October 27 low was off over 30% from a week before, whereas the SSEC's low that day of down only half as much proportionally.
Even allowing for the overnight 3.5% gain in the Dow Jones Industrial Average, it may seem odd that the Asian stock markets were slightly up during the day. Outside China, other significant bad news included a 35% drop in Japan's exports in December from the year previous and South Korea's fourth-quarter economic contraction of 5.6% (much more than expected and the largest decline in over 10 years).
The predominant narrative to "explain" this seems to be the assumption that governments in Asia and elsewhere will strengthen measures to ease the financial crisis and palliate the worldwide recession: a variant on the "bad news is good news" theme.
In the case of China, some analysts hope that the economic stimulus beginning last October will cushion the slide and help keep overall growth in 2009 at least over 7%. However, there are formidable obstacles, including decreasing external demand, the elimination of raw materials overstocks, and declining investment in construction and real estate, that will weaken the Chinese economy through at least through the first half of the year, if not beyond.
It is unlikely that government measures will be able to arrest the decline in production. Other developments, including declines in global demand for exports, in investment, and in domestic demand (as a result of declining employment figures) all conspire to make 2009 more difficult than even yet is generally suspected. Moreover, even if investment in production picks up later in 2009 due to government stimulus measures, this will not do much good if domestic and global demand does not match it.
A consensus is thus emerging that the Chinese government's stimulus as presently configured will not be enough, and that additional monetary and fiscal measures will be necessary, from which comes the aforementioned belief that governments will do more. However, Thursday's bad news was significantly worse than expected and has not already been factored into equity prices. Therefore, what we have is a case of willful self-blinding and wishful thinking, indicating that further losses will be necessary before a first cycle of capitulation is complete.
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First published in Asia Times Online, 23 January 2009