So China’s Growth Looks Good, But Now What?

The blast furnace of bankrupted private Chinese steel maker Haixin Group has been quiet for two years, but next month it will start to guzzle iron ore and churn out steel once more as its new owner, Jianlong Group, sees a chance for business.

Steel prices have been rising across China and many steel mills are again seeing profits, despite a general overcapacity, as Beijing rolls out stimulus measures to arrest the slowdown.

Blessed by government-led infrastructure spending and a revival in property development, China’s headline GDP growth is looking good for the first quarter of 2016.

Policymakers are showing signs of relief, even though concerns remain over whether Beijing is just lengthening the fuse on a debt bomb or undermining the sustainability of growth by putting de-leveraging and capacity reduction on the back burner.

“Fears about a China hard landing should be over, instead, a small V-turn or U-turn in growth is expected,” said Chen Xingdong, the chief China economist with BNP Paribas in Beijing.

“But it is an old path of growth. China is on the old path again because it can’t find a new one.

“China is not so serious about economic restructuring or capacity reduction … Beijing makes great thunder but the rain is small.

“No one has the guts to do what [China’s former premier] Zhu Rongji did in the late 1990s as neither the domestic nor the overseas environment is favourable.”

Zhu had in the late 1990s shut down thousands of inefficient state-owned enterprises and thrown an estimated 30 million state workers out of jobs.

China’s National Bureau of Statistics is scheduled to release China’s first quarter GDP growth on Friday morning, and most analysts believe the official number will be 6.7 per cent or 6.8 per cent – a result that would give Beijing fresh ammunition in convincing the rest of the world that China’s economy is fine.

The “worst fears about China” were defied by better-than-expected economic indicators for March and the first quarter, said Louis Kuijs, chief Asia economist for Oxford Economics in Hong Kong.

“Even for people who remain skeptical about China’s medium-term trajectory, they will say ‘wow, this government really is keen to keep growth pretty robust’,” said Kuijs.

While China has not announced a stimulus package as it did in late 2008, various institutions are sparing no efforts in rolling out pro-growth measures – the central bank has been permitting banks to increase credit and the planning agency has created special funds to kick start infrastructure projects.

In a meeting with eight provincial governors on Monday, Premier Li Keqiang said “more positive signs” were showing up in the Chinese economy.

Economic indicators in investment, consumption and profitability had proved “better-than-expected” with better market sentiment, the cabinet concluded.

“If growth is about 6.8 per cent in the first quarter, it means the likelihood for stronger-than-6.5 per cent full-year GDP growth is very high,” said Zhou Hao, an economist at Commerzbank in Singapore. “Chinese policymakers can relax a bit and take a deep breath.”

China’s March export figures surprised the market by bouncing back to positive territory after having fallen in the previous eight months. Meanwhile, the official manufacturing purchasing manager index moved into expansionary territory in March – the first time in 9 months.

Foreign exchange reserves stopped declining in March and gained US$10 billion, showing improved sentiment about China’s economic future and the yuan’s value.

Meanwhile, China’s pursuit of ambitious targets – the government has said that annual growth should not be lower than 6.5 per cent by 2020 – implies “some backsliding in areas like deleveraging and cutting capacity” and could hurt the country’s long-term prospects, Kuijs said.

“Some of the reasons behind the stronger growth now are not necessarily so good for China in the longer run,” he added.

For now, a Chinese economy with certain growth momentum is better than one at risk of crashing.

“The panic about China being on the brink of a hard-landing…will fade,” said Mark Williams, the chief Asia economist at Capital Economics in London. “The outlook for the next year or two is probably better than most people recently thought.”

But the rosy picture may have a by-product of increasing some tensions.

With Jianlong Group, a conglomerate in control of 15 million tonnes of steel production capacity, ready to switch on its rusty equipment in Shanxi province, more signs are emerging that there will be fewer incentives for China to downsize, local media report said. Two-thirds of steel plants were running at a profit by April 8, according to news portal Hexun.com. In 2015, only half of steel plants were running at profit.

That may dash the hopes of the United States, Britain and Germany that China will get serious in reducing steel capacity.

“Because of China’s size, it affects producers around the whole world,” said Williams. “China is trying to solve its problems of overcapacity by exporting a lot of excess capacity, and that doesn’t solve the problem globally, it just passes the problem somewhere else.”

Chinese leaders will have enough excuses to defend and hail their policies.

“China isn’t changing its growth model,” said Zhou at Commerzbank. “But every country is basically doing the same thing – everyone is looking after their own growth, and few are conducting structural changes.

“In a world of fierce competition, China has no reason to step back.”

By ZHOU XIN Apr. 14, 2016 on South China Morning Post

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