By Jason Simpkins
China’s economy grew by 7.9% in the second quarter, exceeding most analysts’ expectations, and lending credence to Beijing’s goal of 8% annual growth. Now, with the nation awash in liquidity and the economy picking up steam, the only task ahead of the central government is deciding when to rein in lending and let the economy stand on its own two feet.
The momentum behind China’s economy is staggering.
"," economist Allen Sinai of Decision Economics told The Associated Press. "No longer lawless, no longer difficult to deal with, much more responsible. It is now a powerhouse among economies and finance. And it's a rich country."
In just the past few weeks, two of the world’s key global institutions – the World Bank and the Organization for Economic Cooperation and Development (OECD) – and a large swath of investment banks raised their 2009 and 2010 growth estimates for China’s economy.
The OECD said it now expects China’s economy to grow by 7.7% this year and the World Bank boosted its projection to 7.2% growth. GDP will expand by 9.3% in 2010, according to OECD estimates.
BNP Paribas SA (OTC: BNPQY), Barclays Capital, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE: UBS), Morgan Stanley (MS), Standard Chartered Bank, and RBC Capital Markets all raised their forecasts for China’s economy as well.
So far, BNP Paribas SA is the most bullish on China’s prospective growth, as it boosted its prediction to 8.2% this year. That would top Beijing’s 8% target. Barclays Capital, Goldman Sachs, and JPMorgan all raised their 2009 forecasts to 7.8% growth.
“The strong acceleration in underlying economic activity is now unmistakable,” Goldman Sachs economist Yu Song told TIME magazine.
China’s Homegrown Growth
China’s $585 billion (4 trillion yuan) stimulus package gave the economy a big kick in the first half of the year, spurring bank lending and driving fixed asset investment. It even stimulated the oft-maligned Chinese consumer, boosting domestic demand while the market for exports remained dormant.
Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008. And even though the economy is clearly on the road to recovery, it’s not likely lending will let up for the rest of the year.
BNP Paribas chief economist Chen Xingdong told Bloomberg thathe expects new loans will reach 9.5 trillion yuan by the end of 2009.
“The growth recovery has been even stronger than our anticipation,” Chen said. “Strong fixed-asset investment growth and retail sales have started to generate real demand for industrial production.”
Fixed-asset investment rose 33.5% in the first half year to $1.34 trillion (9.132 trillion yuan), according to the National Bureau of Statistics (NBS). Investment in infrastructure rose 57.4% year-over-year, with spending on railways up 126.5% and highway spending up 54.7%. Property sales were up 53% in the first six months from a year earlier.
Of course, fixed-asset investment has been consistently strong in China for the past decade. The real turnaround in the past six months has been that the frugal Chinese consumer has begun to spend more liberally.
China's retail sales in the first half of the year rose 15% to $859.6 billion (5.87 trillion yuan). Retail sales in June also rose 15% from May, said NBS spokesman Li Xiaochao.
"There were two highlights in promoting domestic demand: commercial apartments sales rose by 31.7% in the first half year from the same period last year; automobile sales expanded by 17.7% year on year," Li said.
Auto sales reached 6.1 million vehicles in the first six months, helping China to supplant the United States as the world’s largest automarket. Sales could easily surpass 12 million this year.
“The rebound has been driven by the domestic economy,” Jing Ulrich JPMorgan Chase & Co.’s Chinese equities strategist told Fortune magazine. “The consumer proved resilient – and the government acted as a catalyst.”
“China can still achieve 8% growth,” she said. “Everything is happening very fast there.”
The One Potential Hurdle for China’s Economy
There’s no question that China’s stimulus package has been an unequivocal success. In fact, the only problem may be that it is working a bit too well.
In the United States concern about inflation prompted Federal Reserve Chairman Ben S. Bernanke to outline an “exit strategy” for the withdrawal of liquidity from the financial system. Similarly, China’s biggest challenge going forward will be clamping down on lending to keep potentially hazardous bubbles from growing in its economy.
Inflation is a particular concern, as rising commodity prices have crept into imports.
"Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures," the People’s Bank of China (BOC) said in a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department. "At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing."
However, as in the United States, policymakers in Beijing have said they will remain committed to “proactive fiscal policy” until it is certain a recovery is underway. In fact, some analysts don’t expect to see a significant change in policy until November, when leaders and regulators meet for their annual conference on the economy.
“We must see that the economic recovery is not on a solid foundation, and the negative impacts from the international crisis have not eased,” said Chinese Premier Wen Jiabao. “An improvement in the economy does not mean the difficult period is over.”
Indeed, stimulus must be maintained until China’s all-important export sector has recovered. And while Chinese exports climbed 7.5% from May to June, they were still down 21.4% from a year ago.
Of course that doesn’t mean Beijing will just sit back and wait for lending to reach excessive levels.
“China has achieved impressive results in reviving economic activities," Gao Shanwen, chief economist with Essence Securities, told Reuters. "The basic tone of the appropriately loose monetary policy is unlikely to change, but there will be fine-tuning."
The BOC has traditionally used a quota system to control lending, telling banks not to exceed specific ceilings. It may continue to do so if the central bank does not see a sufficient drop in lending. It may also choose to provide banks with a less stringent lending guidance, or range, rather than an outright ceiling.
“The banks are highly responsive to government policy,” Ha Jiming, of China International Capital Corp. Ltd. (CICC), the nation’s largest investment bank, told The Financial Times.
Punitive bill issuances are another tool in the central bank’s toolkit. In September, the BOC will require banks to buy $15 billion (100 billion yuan) in special bills. The bills will be issued at punitively low interest rates and reduce the amount of money banks have on hand to lend out.
Regardless of what methods it chooses, the BOC is clearly ready to act. But it won’t jeopardize a recovery in a preemptive assault on inflation.
The central bank "will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum,” said Su Ning, vice governor of the People’s Bank of China.
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