Neuberger Berman senior portfolio manager, Greater China Investment Team, Frank Yao agrees, adding: “There is talk in the US about a hard landing in China and that investors have to be more cautious but no country can sustain real GDP rates of over 9%. The question is how many countries are producing real GDP rates of 7% and the answer is none except China, which we expect will grow its real GDP at 7% in the next three to five years.”
Yao as well as other market participants also note that the slowdown is different from the 2008 to 2009 crash when the country’s export led economy buckled under the weight of the financial crisis in the West, which sent world trade tumbling to a record 10.5%. This put a firm brake on China’s growth which fell sharply from its 14.8% peak in the second quarter of 2007 to 6% in the first quarter of 2009. The government injected a staggering $600bn into the economy which, combined with lower interest rates and a flood of bank lending had the unintended consequences of high inflation, soaring property prices and an increase in non-performing loans. As a result, the policy screws had to be tightened to dampen the overheated economy.
A softer approach
This time around the descent has been far gentler. According to the International Monetary Fund, the baseline forecast for world annual trade is 4% annual growth in 2012 which is below the 6.4% trend from 1994 to 2011 but nowhere near the collapse recorded in 2008 to 2009. In addition, construction of so-called social housing for lower-income families, reinforced by recent investment announcements in key metropolitan areas such as Tianjin, Chongqing, and Changsha, as well as in Guizhou and Guangdong provinces, should help off set the decline. The central government is also planning to take a leading role in the financing of the current spate of projects in contrast to the bank-funded initiatives of three to four years ago, which led to a troublesome overhang of local government debt.
Moreover, the general consensus is that the government wants to avoid the classic boom and bust cycle that characterised the post financial crisis era. Stock markets may continue to vacillate between hopes and fears of another stimulus package, but many believe that the emphasis is on slower and ultimately higher quality growth. Officials have some breathing space because unemployment has not spiked as it did in 2009 when over 20 million jobs in Guangdong Province alone were shed. More importantly perhaps, plans seem to be on hold in the run up to the once-in-a-decade leadership transition that is closely looming on the horizon.
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