China’s Slowing Manufacturing Activity Tests Policymakers’ Resolve

So far China’s new leadership has resisted short-term fixes to the country’s slower growth and held true to the need for deeper structural reforms to rebalance the economy. The latest measure of economic activity — HSBC’s flash purchasing managers’ index for May — may test their resolve, but not, this Bystander hazards, break it.

The May reading, at 49.6, down from April’s 50.4, was the lowest in seven months. More germanely, it fell below the 50 mark that delineates expansion from contraction. The modest expansion of manufacturing activity that has been seen since the slowing economy started to pick up steam again last autumn has been replaced by modest contraction. The second area of concern is that the weakness seen by China’s manufacturers in global demand for their goods and services seems to have spread to their domestic customers.

The difficulty for policymakers is that they have limited scope even for short-term fixes. Monetary policy is already easy and loosening it further or splashing out on another round of government funded infrastructure investment spending risks further inflating property bubbles and an already concerning local government debt overhang. At best there is likely to be spot stimulus measures applied where local employment conditions put social stability at risk.

One of the vehicles for this might be the new leadership’s urbanization plans, a centerpiece of its long-term management of moving China to a slower growth trajectory than the double digit annual growth it averaged over the past three decades. While the plan will take years to implement, it could set a tone for structural reform that would have a more immediate effect on economic confidence, and prevent GDP growth for the year falling below 2012′s 7.8%, its slowest in more than a decade.

China Granted Arctic Council Observer Status

Being granted observer status at the Arctic Council is a significant step forward for China’s trade and energy ambitions on the roof of the world. A northern route through the Arctic would lessen the costs and dangers of shipping Chinese goods to Europe via the traditional and lengthier sea routes through the Moluccan Straits, the Indian Ocean and the Horn of Africa.

Global warming makes alternative northern routes feasible, at least in the summer months, which offer the promise of an ice-free northwestern passage to Europe. It also makes drilling for oil and gas a practical possibility. The region may hold up to a quarter of the world’s untapped fossil energy reserves.

Beijing has been beefing up its Arctic research and is building a new high-tech polar expedition ice-breaker due to be in service next year. China already has the world’s largest non-nuclear icebreaker, the Ukraine-built Xue Long (Snow Dragon) which last year made the first passage from China to Iceland through the far north. Chinese mining companies are starting to invest in Greenland’s mineral resources and last month Beijing signed a free trade deal with Iceland, with which it is also cooperating on geothermal energy.

The full members of the Arctic Council — the Nordic countries, Canada, the U.S. and Russia — all have an Arctic coasts, which China self-evidently does not. Observer status, which it now shares with Japan, India, South Korea, Singapore and Italy, gives China the right to listen in on meetings and propose and finance policies.

China’s regional push into Africa and the Indian Ocean has met some resistance. Beijing is likely to continue to move cautiously if determinedly in the Arctic, not least because Russia, with its long Arctic coastline, sees itself as the regional power and energy bridge between Asia and Europe. But as we noted before, few can doubt that China’s mariners, fishermen, scientists and petroleum engineers will be plying the increasingly less icy waters of the Arctic in ever greater number.

Fragile Industrial Output Tests China’s Policymakers’ Nerve

Economic activity remains weak in China. April’s industrial output was up 9.3% in April from March’s 8.9%, a seven-month low, but short of expectations of 9.5% growth. The recovery that started in the second half of last year is not gathering any momentum. Second-quarter growth is on track to be little better than the first quarter’s 7.7%, and likely less than 8%.

That is testing policymakers’ patience. They would like to stimulate short-term growth, but are already  running loose monetary policy. Any further loosening risks pushing up consumer prices and further inflating asset bubbles, particularly property prices. Meanwhile, state-led infrastructure construction spending, which has been a big driver of growth since the 2008 global financial crisis, is running out of steam and effectiveness, and the debt overhang, as much as 20 trillion yuan ($3.25 trillion), is a worry in Beijing.

The temptation, particularly for provincial and local officials, is to fall back on the tried and trusted remedy to provide a short-term boost to growth, but that also delays the necessary long-term rebalancing of the economy to which the new leadership repeatedly says it is committed. For now, policy makers are likely to stay their course, but they badly need some growth to steady their nerves. With the global economy sluggish, that is more out of their hands than they would like.

Baosteel Cuts Prices

Baoshan Iron & Steel is cutting prices for its main steel products for the first time in nine months — a clear sign of falling demand in a sputtering economy. As China’s largest listed steelmaker where Baosteel leads others in the industry will follow. The cuts are of the order of 5% depending on the product line and in line with discounts customers have already been getting in recent months. With demand weak and output at record levels the supply glut is worsening.

China’s Dodgy Trade Data

On the face of it, China’s April trade figures look healthy: exports were up 14.7% year-on-year; imports were up 16.8% on the same basis; the trade surplus was $18.2 billion. All three figures were better than forecast. And from there it is possible to draw a straight line to the notion that these figures  indicate a revival of global demand which in turn will boost China’s GDP growth.

The question is, how reliable are the base figures. March’s trade numbers were incredible, in a bad way. The suspicion was that some Chinese companies were cooking their order books in order to get funds to speculate on the appreciation of the yuan against the dollar, essentially disguising hot money as trade payments. This was done by parking goods in Hong Kong and booking them as exports so they could get forex  loans from the banks, or in some case, we suspect, by just creating phantom export orders.

The practice was so widespread that authorities earlier this month announced measures to crack down on these hot money inflows, and threatened “strict supervision” of any import-export operation whose booked and actual shipments appeared out of kilter. These measures take effect at the the end of June, giving companies time to get their books in order. But meanwhile monthly trade figures have to be looked at with a healthy dose of skepticism.

This Bystander notes, for example, that April’s purchasing managers’ indexes showed manufacturers’ new export orders shrank, the opposite to what the April trade figures imply. Nor do China’s monthly trade figures jibe with those of South Korea and Taiwan, both of which reported weakening trade for the month. As we can’t trust the trade figures, we won’t be drawing an assumptions about what they mean for the economy as a whole.

China Pumps Up Its Currency, But To What End?

China’s most recent manufacturing data showed recovery spluttering with exports soft, yet the yuan follows that by hitting a 19-year high agains the dollar. More intriguingly, the People’s Bank of China has let the currency rise within the allowable limits of its daily trading band; the yuan can rise or fall by 1% from a daily reference rate fixed in the morning by the central bank.

The yuan certainly isn’t off the leash, but the central bank is giving it more latitude of late than it has in the past. The currency has gained five times as as much so far this year as it did in all 2012. The question is whether this is part of the central bank’s preparations to open further China’s capital account, a next step being to widen the daily trading band of the currency. Those of that view latch onto the words of PBoC deputy governor Yi Gang who told last month’s annual meeting of the International Monetary Fund in Washington that the band would be widened “in the near future.” The previous revision was announced in April last year, when the band was doubled.

Another doubling might  be on the cards. If it is, it would most likely be to get the currency swiftly to an equilibrium level with the dollar as much as anything. The aim would be to discourage the present one-way bet on appreciation that currency speculators now regard the yuan to be. Policy makers are exasperated by that. They  consider the yuan to be close to where it should be against the dollar (real trade weighted value might be another thing, though). Except in exceptional circumstances most freely convertible currencies aren’t so volatile on a daily basis that they bounce around in a 4% range, so there doesn’t seem much need to widen the band just to accomodate regular daily trading fluctuations.

Soft Patch For China’s Economy Continues

The pause for breath in the recovery of China’s economy from the 2011–12 slowdown has extended for another month. The official purchasing managers’ index (PMI) for April fell unexpectedly to 50.6 from March’s 50.9. The forecast had been that it would break above 51. The reported number reflects a similar softening reflected in HSBC’s preliminary PMI number announced last week.

The official indicator best reflects activity at larger enterprises and HSBC’s that at small and medium sized ones, suggesting the soft patch is being experienced across the economy. That, indeed, seems to be happening across the global economy, too, affecting demand for Chinese goods: the new export orders sub-index in the April official  PMI fell below the 50 level that delineates expansion from contraction; the same sub-index in HSBC’s version was also down.

For its part, Beijing is already signaling that it will fall back on its old favorite — spending on infrastructure investment — to pep up GDP growth in the second quarter, despite that being a drag on rebalancing. Inflationary concerns, particularly continuing rising property prices, give policymakers little to no scope to ease monetary policy further. First-quarter growth came in at 7.7% down from 7.9% in the final quarter of 2012. As things stand, second-quarter growth could come in at 7.5%, which is also the official full-year target for 2013.

Structural Slowdown in China’s Economy Already Six Years In

Much is said about if and when China will shift, as would be expected after three decades of 10%-plus annual GDP growth, to a new phase of slower economic expansion. The International Monetary Fund suggests it may already have happened.

In its latest annual Regional Economic Outlook for Asia and the Pacific, it says that China’s trend growth peaked in 2006-07 at 11% and has been on the decline since. In other words what has happened to growth rates since is not the consequence of a cyclical slowdown caused by the global financial crisis but the start of a structural change to the economy. The IMF’s economists note that the same happened to India’s economy just shortly afterwards. Its trend growth peaked at 8%.

For both countries, the IMF says, the slowdown seems to have been driven largely by a decline in trend total factor productivity growth — broadly that they are getting less productivity gain from technological and process change — though to this Bystander that could be symptom as much as cause. The IMF says China’s medium-term trend growth is now 8%, the same, as it happens, as its forecast for GDP growth this year.

The Fund’s economists acknowledge that their methodology is intrinsically backward looking. That though lets them dodge the hard question, how much farther down the declining arc of trend growth is there to go?

China’s TV And Film Industries: Unexploited Soft Power

A report crosses this Bystander’s desk from Oxford Economics, a consultancy commissioned to quantify the economic impact of China’s film and TV industries. The commission comes from the Motion Picture Association of America, Hollywood’s lobbying arm, and the China Film Distributors and Exhibitors Association. It is, no doubt, intended as an opportune prod in the direction of more opening of China’s domestic film and TV markets by emphasizing the potential for growth at a time when boosting cultural industries and “going out” is to the forefront 0f Beijing’s mind.

The reports lays out quite how significant, fast-growing, and promising the industry is — as would be expected in a country with a large population, strong economic growth and rising incomes. Oxford Economics tots up for 2011 a 100 billion yuan ($15.5 billion) contribution to GDP, 909,000 jobs and 22 billion yuan in tax revenue from the industry directly.

Taking into account the multiplier effect across the rest of the economy, the report boosts those numbers to a 272 billion yuan contribution to GDP, 4.5 million jobs and 57 billion yuan in tax revenues. That later GDP number is equivalent to 0.6% of total GDP, similar to the contributions of  the computer and telecoms equipment industries. Where the film and TV industries are much different is in their level of exports. Total exports in 2011, Oxford Economics reckons, were 2.3 billion yuan, 90% of which was accounted for by film. The telecoms equipment makers did more than 10 times as much each quarter.

Cultural exports are these days a central part of a country’s soft power — as Hollywood’s bear testament, just as much as do China’s tight quotas on foreign film imports. While the leadership in Beijing is now paying more attention to this aspect of China’s global projection of itself, China has not been able to convert its popular arts and culture into an arm of diplomacy in the way that, say, its neighbour South Korea has. Hallyu,  a mix of popular South Korean films, TV, food and K-pop music culminating in the Gangnam-style phenomenon, has proven to be an extraordinary calling card for the country. South Korea has risen to 11th on Monocle magazine’s annual ranking of soft power, a list on which China doesn’t make the top 20.

It has also made South Korea a destination for cultural tourists, particularly from the rest of the region. What little film and TV tourism there is in China is local and localized. That is a hugely untapped opportunity, the Oxford Economics report suggests, treading safe ground rather than venturing into the deeper waters of exporting cultural values and projecting soft power. In the same vein, it casts the impact of hallyu in the light of domestic tourism within South Korea.

The unsaid part highlights another difference between South Korea and China, whose state-planned cultural exports have focused on traditional high-culture aspects of China’s arts and heritage, as might be expected of programmes devised by government officials and intellectuals. South Korea’s cultural image is very much a reflection of its contemporary and popular culture, which is driven, for better or worse, by a commercial market. China, where even popular TV is sanitized for social correctness, doesn’t have such a readily accessible and identifiable non-political contemporary culture, or the rambunctious marketplace to nurture it.

Hermès Informal Guide To China’s GDP Growth

Here is another informal indicator of the stalling of the recovery in China’s economy in the first quarter of this year. The chart above shows the quarterly sales growth over the past nine quarters of Hermes, the Paris-based fashion and luxury-goods maker, in Asia outside of Japan. That is predominantly sales to Chinese in China and those shopping in Hong Kong, Macau, Taiwan and Singapore. The figures are at constant exchange rates. Taking the broader regional sales mitigates to some extent  last year’s crackdown on conspicuous consumption within China.  But the pattern is clear, recovery in the fourth quarter of 2012, followed by a big splutter in the first quarter of this — although still within the context of some pretty robust growth.