Mar 8, 2012

China: What does the lowering growth of 2012 mean?

The Chinese authorities have decided to reduce their 2012 growth target to 7.5% from 8.0% previously suggests that the authorities are heading back to the “rebalancing act” which they
have left since the global crisis, in the sense that they will reduce their dependence on an investment-led & export-led economy to a more diversified consumer-oriented economy. In the process, the authorities have targeted 2012 inflation at 4.0%, a reduced budget deficit of 1.5% (previously was 2.0% of GDP), growth of fixed-asset investment at 16.0% which is below our estimates of 18.0%; and money-supply growth of 14.0% which is in line with our estimation. 

What does the lowering of growth mean? While the decision to slow down the growth could merely alleviate the issue of “hard” versus “soft” landing, more importantly if we were to look ahead of the policy structure, it suggests that the authorities could be increasingly focusing on driving the economic growth through higher levels of “Total Factor Productivity” (TFP) in a
move to step up their position to reach the high income nation status. If our assessment in correct, countries like Malaysia aspiring to migrate from the middle income to high income nation will have to accelerate the growth process of TFP which we have targeted at 2.5% while currently at 1.7% in order to drive up innovation led growth.  The question now is how fast can we accelerate our TFP?

•  The Chinese authorities have lowered the 2012 growth target to 7.5% from an 8.0% goal that has been in place since 2005: Their decision of lowering the growth target for 2012 suggests that the policymakers are determined to reduce their overdependence on exports and capital spending in favor of consumption.  Following their decision to reduce 2012 growth rates, we have also lowered our 2012 growth to 7.6% from 8.5% previously 
•  Is it a positive move? We welcome this move as China is increasingly being plagued with issues like (1) heightened pollution; (2) widening income gap; and (3) aging population along with an under-developed social-security system. Underpinned by these economic issues, the decision by the policymakers to shift to a more-balanced growth model is viewed timely from our point of view.  
•  Rebalancing act can now take place: We believe the authorities will have to shift to a more sustainable and efficient economic model and achieve “higher-quality development” and reduce their dependence on exports and investment as well as reduce the state’s role in favor of private enterprise. To this, they will have to boost the income which is one of the biggest hurdles facing the policymakers given that the government’s income outweighs that mass low income. 
•  Possible reduction of reserve ratio by 100-150bps: What could happen is that the policymakers may cut the bank-reserve ratio further in 2012, to which we are looking at another 100-150bps reduction. The lower 2012 growth target with inflation target of 4.0%, the same as in 2011 will provide some room for monetary easing in 2012, which in turn will help increase bank lending and boost investment. 
•  However, we are of the view that the role of monetary policy will not be aggressive: The reason being, if we were to trace back, it clearly shows that from 2009 to 2011 the monetary policy played a vital role in helping to keep the economy humming through the global financial crisis. There are now fears that another surge in bank loans could result into financial system. And that means the monetary policy may take a breather in 2012, implying that the 1-year benchmark lending rates could at best reduce by 25bps in 2012 from the current 6.56%.
• On the fiscal front, there are some levels of disappointment: We were looking at a budget deficit of 2.5% for 2012 with the government ramping up spending and cutting taxes to boost demand. However, the authorities have decided to reduce the deficit target to 1.5% of GDP in 2012. Our disappointment is that if we trace back over the past three years, the “outcome” has undershot the “target” on average by 0.7ppt. Hence, the 1.5% 2012 budget deficit target could result in a deficit of less than 1% of GDP. The preliminary budget data indicates 2011 deficit of 1.1% of GDP. 
•  What does the lowering of growth mean? While the decision to slow down the growth could merely alleviate the issue of “hard” versus “soft” landing, more importantly if we were to look ahead of the policy structure, it suggests that the authorities could be increasingly focusing on driving the economic growth through higher levels of “Total Factor Productivity” (TFP) in a move to step up their position to reach the high income nation status. If our assessment in correct, countries like Malaysia aspiring to migrate from the middle income to high income nation will have to accelerate the growth process of TFP which we have targeted at 2.5% while currently at 1.7% in order t drive up innovation led growth.  The question now is how fast can we accelerate our TFP?

by MIDF Economics