The Chinese economy right now is like a big beetle on its back with its legs waving in the air, wondering what knocked it over.
But beetles do eventually right themselves. And as monetary and fiscal policy find traction, the odds are that the world's fourth-largest economy will also be back on its feet next year, albeit a little shakily.
To say Beijing has been caught off guard by the sudden downturn is an understatement: the cabinet rushed out an eye-popping 4 trillion yuan ($586 billion) stimulus package on Sunday without waiting for a leadership conference at the end of the month that will set economic policy for next year.
"It is a significantly positive development that the message of the government is now loud and clear," commented Yu Song, a Hong Kong-based economist with Goldman Sachs.
Chinese exports were always going to take a hit from the gathering global recession. And last year's tightening of credit to curb inflation and prick an incipient property bubble was always going to kick in with a delay.
The problem is that these blows to external and domestic demand started to rain down with force at the same time. This sapped the confidence of a country that thought it was insulated from the global credit crunch thanks to capital controls, a non-convertible currency and underdeveloped financial markets.
With inventories already at high levels, squeezing cash flow, companies responded to the deterioration by halting investment.
"Our customers right now are like rabbits frozen in the headlights," said a leading British businessman in Beijing, who sought anonymity to speak candidly.
Banks took fright, too, calling in loans from smaller firms that are the backbone of the economy and even pulling back from foreign banks operating in China. Letters of credit for importers and exporters became harder to get, gumming up trade.
Manufacturing surveys for October plumbed record lows, steel and aluminum producers have slashed output and export orders booked at the recent Canton Trade Fair fell 17.5 percent.
A five-star hotel decided last week to delay its opening in Beijing to mid-2009, according to a person informed about the decision, while a property broker confided that he expected prices to keep falling well into next year.
In the industrial heartlands, laid-off migrant workers are leaving Guangzhou in their thousands to head back to the farm.
So how will China pull out of the swoon?
Credit Suisse economist Dong Tao said China has never succeeded in boosting its economy purely via infrastructure spending in the 30 years since it embarked on market reforms.
Former Premier Zhu Rongji turned to massive deficit spending after the 1997/98 Asian financial crisis, but it was accession to the World Trade Organization in 2001 and landmark housing reforms that propelled the economy back to a high-growth path, he said.
So until it taps a major new source of growth -- recent land reforms are one candidate -- China will struggle to return to the double-digit pace of expansion of the past five years.
"The fiscal package can stabilize the economy and help to ease the pain in the short term, but until we see the next round of super factors emerge, China won't get back to the high-flying days," Tao said.
MARKET FORCES
On the monetary front, the cabinet announced on Sunday a shift to an explicitly easy stance that central bank governor Zhou Xiaochuan said would mean faster money growth and more interest rate cuts. Beijing also confirmed that limits on bank lending had been removed.
Zhou, who said he expected growth of 8 to 9 percent in 2009, has already cut rates three times since mid-September.
But one school of thought says the days are gone when the economy would automatically do the government's bidding.
Though state-owned, banks operate increasingly along commercial lines and so may resist instructions to open the credit taps. Similarly, state-owned oil firms earlier this year refused to refine more petrol because government-set prices meant they were making a loss. Big queues for petrol were the result.
"Market forces have eroded the government's ability to command and control the economy," said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong.
Not so, retort Tim Condon and Prakash Sakpal at ING in Singapore. They said the last time Beijing relaxed loan quotas was during the severe acute respiratory syndrome (SARS) epidemic.
Annual loan growth duly leapt from 15.8 percent in December 2002 to 21.1 percent a year later, unleashing an investment boom.
"We do not think things have changed so much in China that the policy will not work this time," they said in a report. |
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