Five short-term risks for the Chinese economy

Tuesday, 21 June 2011 00:00 - - {{hitsCtrl.values.hits}}

In the past couple of weeks, market participants have talked about the ‘hard landing’ risks to the Chinese economy . However, a recent report by Deutsche Bank points out that most of these risks may be short-term in nature and manageable. Here’s what it says about these factors.

Power shortage:

Its impact on annual GDP will be less than 0.3%. The recent tariff hikes have already reduced the percentage of loss making IPPs to an estimated 20% from 40%. Another 3% rise in tariffs, which is likely, would turn most IPPs to profitable operation.

Weak manufacturing PMI:

The manufacturing PMI fell to a 15-month low of 52 in May. However, the non-manufacturing (services) PMI remained at a robust 61.9. As the services sector now accounts for 43% of GDP vs 47% for the industrial sector, the weighted average PMI, remains substantially higher than the historical average. This means that despite some short-term weakness in industrial production growth, the deceleration of the overall GDP should be mild in Q2 and Q3. The reasons for current weakness are short term and manufacturing will recover from September.

Property market correction:

The property sector is ‘too important to fail’ as it accounts for 12% of GDP. This means that as soon as the government detects signs of a sharp correction in construction activities, policies will likely be relaxed. Another important factor is that the government’s target of starting construction of 10 million public housing units this year will provide an important cushion in the second half .

Weak auto sales:

After a surge in passenger car sales growth to 53% in 2009 and 33% in 2010, its growth rate collapsed to low-single digits in the past three months. Some investors are concerned that this may mark the beginning of the end of China’s auto boom.

This concern is overblown. Firstly, China’s motor vehicle penetration is still at 58 cars per 1,000 people, significantly below the world average of about 220. This implies a comfortable auto production growth for the next 15 years. Also, there are one-off factors like component supply from Japan , the impact of which should diminish soon.

Over-tightening of monetary policy:

Historically, in periods when inflation is high and rising, the relatively hawkish views of the central bank tend to prevail, but in periods when inflation is falling and growth weakening, the pro-growth views from other agencies tend to gain upper hand. Under these pressures monetary policy is likely to become neutral in late Q3.