China Analyst provides good insight
Excerpts from The Beijing Axis Feb. Report
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At the Highest Level
China’s sharp slowdown will catch many by surprise and wrong-footed. Indeed, over the next 2-3 quarters
a painful adjustment will continue to unfold, requiring good information, solid planning skills and a
strong ability to implement. Anticipating and managing risk must be the focus. But do not loose sight of
China’s long term trajectory—it will remain a prominent market and opportunity, outperforming developing
and developed countries over the medium and long term. Do not get caught out twice!

We acknowledge the seriousness of the current and unfolding environment.
We face testing times. But we must add that now, more than ever, it is necessary to maintain a balanced perspective on China’s future. We must guard against a view that is too heavily influenced by adverse short term trends or prevailing sentiment that is so deeply negative (and deteriorating).

A balanced view would also enable planners to differentiate between short, medium and long term trends, issues and prospect. Over the medium and long term China’s prospects remain solid. We must also consider that it is natural for developing countries to face periods of turmoil. In this respect China is really now just behaving ‘normally’ and there is no merit in becoming utterly disillusioned with China. Rather, see China for what it is: a key developing market, with the associated dynamism (good and bad) that is endemic in developing countries, but that will remain prominent
and even become more important over the long haul.

1/
China’s banking system has sustained limited direct losses from the financial crisis, and is in much
better shape now than it was after the Asian financial crisis a decade ago. The global slowdown in
demand is set to seriously undermine China’s export growth for 2009, yet the overall impact of the
crisis is expected to be manageable, even though GDP growth may slip below 7-8% in 2009.
By Barry van Wyk.

Asian financial institutions have sustained only 3% (or USD30 billion) of the USD965 billion sub-primerelated losses, and the bulk of this in Japan. Improved liquidity management since the 1997/1998 Asian financial crisis, along with low levels of lending to the corporate sector in recent years, meant that capital losses have not seriously impaired
the profitability of the region’s banking systems. China’s banking system, moreover, has also profited greatly from reforms in the last few years that contributed to reducing the level of non-performing loans extended by major Chinese commercial banks from 18% in 2003 to 9% by 2005.

A lot of the impetus for the slower growth outlook for China in 2009, however, predates the real impact of the financial
crisis. Tightened monetary policies since 2007 have likely been the main driver for dampened demand in China’s real estate sector, and housing sales growth and housing prices have decreased throughout 2008. As a result, new real estate construction and investment have weakened accordingly.

The financial crisis has impaired the flow of foreign direct investment to China, with new FDI contracts declining by 26% y-o-y in the first ten months of 2008 and actual flows dropping in Q4-2008. The rapid decline of China’s stock market, moreover, which has fallen by as much as two-thirds since October 2007 (and losing RMB21 trillion since late
2007), has been aggravated by the weakened outlook for corporate earnings and general risk-aversion associated with the crisis, yet much of the fall in China’s stocks have also been ascribed to their inflated value after 2-3 years of super-gains.

2/
China has not escaped the consequences of the global financial crisis, and its economy has already
taken a hit. But with the Chinese government among the best positioned in the world to inject and
control the spending of a massive stimulus package into an ailing economy without major inflationary
or exchange rate consequences, there is much room for hope. By Lilian Luca.

Decoupled or not?
Researchers (Anderson, He, Zhang) have argued that the dependence of China’s GDP on exports – often quoted at around 40% – has been overstated. They have suggested a smaller figure of about 8-10% as the contribution of net exports to China’s GDP, meaning that even if net exports will stall, GDP growth in China could still be a healthy 8-9% - if, and only if, the other components of GDP (private consumption, government spending, and investments) keep on growing.

A major stimulus package worth RMB4 trillion (almost USD600 billion) was announced near the end of October, in an attempt by the Chinese government to prop up the confidence of consumers, firms and government agencies.

Infrastructure build-up package.
The plan so far includes major transportation system upgrades (railroads, tunnels, highways) and build-up in disaster-affected areas (earthquakehit Sichuan, areas affected by floods, etc.) Utilities and rural infrastructure projects are also part of the plan, as well as projects aimed at environmental protection and technological innovation.

Large provincial-level infrastructure upgrade projects – such as the bridges that will connect Hong Kong, Macao and Zhuhai, and the Hebei “Three Year Big Changes” programme – are all part of additional provincial packages worth around RMB10 trillion. Some of these projects have been rescheduled to commence earlier than was originally planned.

Consumer spending support has not directly been part of the stimulus plan so far, but economists point out that spending in social and educational areas will go a long way to increase the average Chinese citizen’s safety net and quality of life, and reduce the need to continually save for a rainy day, thus indirectly increasing consumer spending. Also indirectly affected will be consumer spending on tourism and leisure, resulting from investments in new railroads and high-speed trains, for example.

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