What is Ahead of China’s Slowing Growth?

By TJ Kim

September 18, 2014

Amid the global economic frustration, China’s miraculous growth rate has slowed down to 7-8%. With the new era of “normal growth”, China’s economic growth may rely heavily on the stimulus from the government investments and flexible policy to maintain its growth rate at the target rate.

Due to the contraction in demand worldwide, manufacturing and property investments have declined in China. Though the level of deterioration in economic activities is not significant, indicators still point downward for China’s economy that once grew without knowing to stop. Economics research analysts from Barclays wrote in Emerging Markets Research,

“(1) the overall inventory condition deteriorated in recent quarters, highlighting downside risks for the Chinese companies; (2) the inventory situation worsened significantly in cyclical sectors such as consumer discretionary, industrial and, to lesser extent, materials; and (3) inventory remained relatively stable in sectors such as consumer staples, utilities and energy.”

On the other hand, infrastructure has been slowly picking up, mainly attributing to the government investment projects. In addition to supporting the economy through infrastructure, the authorities scheduled several measures in monetary policy and numerous projects to stabilize growth.

“The NDRC approved a large number of projects, including some in infrastructure (power, water and transportation) and new strategic industries (biotechnology, new energy, high-end equipment manufacturing, energy conservation & environmental protection, clean energy vehicles, new materials and next-generation information technology).The PBoC has lowered both the reserve requirement ratio (RRR) and benchmark interest rates…  It has also encouraged commercial banks to extend more loans to some of the ongoing infrastructure projects, especially those in the railway industry, through “window guidance”. In recent months, the PBoC has focused more on open market operations (OMO) to regulate liquidity conditions.”

However, all these projects and investment schemes are planned out in a long time horizon. Furthermore, there are no detailed funding plans for these projects as the funding conditions have become less accommodative.

“This time, projects recently approved by the NDRC cover periods from three to eight years. Most projects announced by local governments are also scheduled for the next three to five years. Therefore, we would view them as medium-term measures, not short-term cyclical fixes… Even some of the NDRC approved projects have failed to obtain bank loans during the past few months and, therefore, will struggle to get started. In 2009, all government and commercial agencies worked together to support the stimulus package. This time, the funding conditions are much less accommodative”

Having said this, China may face some difficulties maintaining their current economic growth rate. As uncertainty casts itself upon China’s major trading partners, the U.S. and Euro, the nation has to find a way to sustain itself through an internal economic reform. However, having been a major export country, China may take some time to create demand within itself and to develop technologies to support its growth without having to hinge on foreign nations.

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