Misallocation of capital, speculation, corruption,an aging working population and tighter monetary growth could dampen China’s growth in the next decade.
Declining orders, weaker industrial statistics and anecdotal evidence, indicates that China’s official growth numbers are overstated. Reported, official, first quarter real gross domestic product (GDP) at 8.1 per cent was expected. When the nominal data is discounted by the GDP deflator, however, they are noticeably lower. Electricity production rose by 7.1 per cent. Based on our equation this would imply that real GDP rose by only 6 per cent year-on-year in the first quarter.
Despite our lower first quarter real growth estimates, which are 2.1 per cent below the official numbers, we do not subscribe to the bear case of a hard landing for China’s economy this year. We foresee a mild recovery in the second half, followed by very difficult times for the years 2013 to 2015.
Although some forecasters are expecting quantitative easing in China, We maintain our consistent view that there will be no real change in monetary policy for at least the next six months. Instead fine tuning is more likely as the authorities have learnt their lessons from the huge stimulus given in 2009 and 2010. Senior policy advisors have been openly critical of that policy and wish to control inflation.
Silent Cranes and an air conditioning glut
Indeed, on our latest visit to China in the past few weeks, we found evidence of current economic difficulties following the preceding growth bubble. We drove passed 30 to 40 building sites and noticed that cranes were virtually silent with little or no activity. We also found that interference in the market mechanism had untold consequences.
Last year China’s government introduced subsidies for both urban and rural households wishing to purchase air conditioning units (aircons). In consequence, sales soared in the first half of the year but have since collapsed. They have tumbled because anyone planning to purchase an aircon in 2012 did so last year when government provided them with a subsidy. A major air conditioning tube producer told us that their production fell by some 40 per cent in the first two months of 2012. In March it was down 35 per cent compared with last year and is expected to fall by 30 per cent in April versus 2012, based on orders from aircon companies. April is a peak production month for the aircon sector, but according to our contacts, aircon stocks are still rising and must now be totalling some 30 to 35 million units compared with last year’s sales of about 45 million. So far in 2012, monthly aircon sales are running at around 2.5 million to 3 million but stocks are more than ten times domestic sales.
Consumers are stretched
One of the important messages from our sources was that besides aircons, the distribution chain is overloaded with finished goods such as appliances and cars. The National Bureau of Statistics (NBS) does not monitor inventories within the distribution channels, so its data is not a reliable guide. There are signs that the average consumer is stretched and there are persistent reports that large shopping malls have more sales people than customers. Electricity production, another reliable guide to the economy, is also slowing sharply.
Real Estate Sector continues to slide
The real estate sector accounts for at least 15 per cent of gross domestic product with 60 industrial sectors linked into it. Real estate, for example, directly and indirectly accounts for around 56 per cent of China’s refined copper consumption. The Conference Board of China monitors 33 cities for transactions and 45 cities for prices and is thus a good guide to what is happening on the ground. Transaction volumes fell steadily throughout most of last year in response to government measures to cool the property boom and have continued to do so through the 1st quarter of this year. Officially reported price declines of 27 cities of up to 8 per cent, probably understate the true declines. Promotional material of new units, for example, show that developers are offering large discounts.
Official first quarter data for the real estate sector suggested few surprises. Floor space of residential buildings fell by 5.2 per cent compared with a rise of 12.9 per cent in 2011 and an increase of 19.6 per cent in the first quarter of last year. Commercial buildings floor space declined by 13.6 per cent compared with a growth of 14.3 per cent in the same period of 2011.
Of note was the decline of 3.9 per cent in land space purchased by real estate developers compared with an increase of 32.7 per cent this time last year.
Our real estate contacts believe that it will take three to four years before any real recovery will be evident. We are also told that government would be content to see average price declines of 15 to 20 per cent and will use their influence to ensure that such falls occur in a controlled way. Whether they succeed in that objective remains to be seen.
UK based Simon Hunt Strategic Services and Beijing based Ian Stones are partners in Frontline China Report Service, which monitors China’s economy