Slower growth may have become a new norm for the Chinese economy in 2014, but strong resilience and timely structural adjustments have kept the economy buoyant. Chinas GDP, which grew by around 7.3 percent in 2014, varying by different estimates, still represents an admirable rate of growth especially when compared with other major developing countries. Healthy employment and sustained income growth have turned consumption into an ever stronger driver in regards to overall economic growth. But as China enters 2015, many feel that a weak property market could provide the government with a difficult obstacle to overcome. Banking reforms, especially, the rise of privately-owned banks, have allowed the market to play a more decisive role in credit issuance, while the establishment of more pilot free-trade zones signifies greater liberalization afoot in previously closely-guarded key sectors. Internationally, Chinas growing economic strength is being felt like never before. The inking of Free Trade Agreements, for example most recently between China and Australia, means China is more open for business. The internationalization of the Yuan, the Chinese currency, has gained greater momentum and more offshore RMB trading centers were established and currency swap deals signed with Chinas major trading partners. But the Chinese economy is never without its challenges and of those challenges, overcapacity remains a prominent issue. This was compounded by a rapid cooling-off of the property market, a main pillar of the economy. Furthermore, Chinas growing local debt has yet to be contained effectively. Ultimately, a number of new norms have been recognized in relation to the Chinese economy, revolving mainly around the idea of a new normal economic growth rate, down from the highs of 10 percent growth which China experienced in the past. A slower speed of growth, around 7 percent, which is expected to be revised downwards by half a percentage point over the next five years; a more balanced structural framework which shifts towards consumption as a driver for growth; and a fundamental shift in the nature of growth, away from polluting industries, represent the new norms that many within the press and academia speak of. As mentioned above, China still maintains a respectable rate of GDP growth, causing many to ask whether concerns of a Chinese slowdown and the impending so-called hard landing have been over-exaggerated. On this point, Shen Hong, the Shanghai Bureau Chief of the Wall Street Journal explains, It depends on how you look at it. If you look at what matters to China, then maybe the concerns are a little bit overrated. The evidence is that the labor market remains pretty healthy… Thats why I think the leadership in general has taken a pretty relaxed approach in handling the situation. But as Shen goes on to explain, If youre an outsider, a foreign country like Australia or Brazil that depends increasingly on exporting resources to a robust economy like China, they will become extremely worried if there is even a slight slowdown in Chinas economic growth. Observers agree that the property market remains a big risk for the Chinese economy going into 2015. In explaining the context of the Chinese property market slump, Arthur Kroeber, Head of research at Gavekal Dragonomics and Editor of China Economic Quarterly, points out, In each of the last two years, Chinese cities have completed somewhere around 11 or 12 million units of new housing. We think that the underlying demand for new housing in China is probably no more than 10 million units, and over the next several years it will probably decline even further to around 9 million units a year, which is still a lot and you need a lot of construction activity. But the point is that more housing has been built in the last couple of years than the market can absorb. Clearly, talk of such figures is bound to make for grim reading for the central government, but local governments in second, third and fourth tier cities are likely to be most anxious of a deteriorating property market. As Shen Hong of the Wall Street Journal explains, the situation of the market in cities like Beijing and Shanghai is drastically different compared to second, third and fourth tier cities with huge over-capacity and over-supply. Were going to see a divergence between these two groups of cities in the future when it comes to the state of the property market. In other words, demand for property in Beijing, Shanghai, Guangzhou and Shenzhen will remain pretty healthy, because it attracts not just local investors but also global investors. But if you look at a city like Changzhou, or a very small city in Sichuan province, youll have to think twice about it. But in general its inevitable for the Chinese property market as a whole to undergo some sort of correction after years of robust growth because its certainly overheated. I think the trick is how to manage a so-called soft landing. If theres a soft landing for the Chinese property market, theres a soft landing for the Chinese economy. Measures used to stimulate the market in 2014, such as the wholesale lifting of property purchase restrictions in all cities, alongside a slight easing up on credit, led to improved activity and confidence within the market for several months, only to tail off towards the end of the year. However, the option that the government pursued to support the market in 2014 will not be available for 2015. According to Arthur Kroeber of China Economic Quarterly, the only option available to the government going forward is to loosen credit. However, Kroeber believes authorities will be reluctant to pursue such a course too strongly as pumping credit into the market could lead to bubbles. Furthermore, loosening credit and taking further steps in quantitative easing could make it difficult for the country to rebalance its economy and reduce industrial overcapacity in areas such as shipping and steel. As Shen Hong notes, you cannot make funding costs too cheap otherwise it will encourage (the) use of cheap credit to commit to inefficient investments.
Posted on: Tue, 20 Jan 2015 02:29:55 +0000
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