IN ANOTHER YEAR, the worst flood season in more than two decades would be a significant crisis to test authorities. The damage to crops and livestock from June and July’s torrential rains, precipitation that was far heavier than usual, is substantial, and a reported 3.7 million people have been displaced. But the economic loss — put by state media at 145 billion yuan ($21 billion) as of the end of July — is not as severe as that caused by the Covid-19 pandemic.
The Yangtze and its tributaries in Hubei, Jiangxi and Anhui in central and eastern China are the areas worst affected by the flooding, with the response in Jiangxi said to be on ‘a war footing’. Thanks to improved flood control and emergency management, however, the death toll has been relatively light for the scale of the disaster: 158 people dead or missing, according to the latest available figures.
Early in June, a 1960s-era dam in Guangxi collapsed under the pressure of building floodwaters, raising concerns about the safety of hundreds of other similarly aged dams, and for the massive and iconic Three Gorges Dam (seen above) on the Yangtze (which is of later vintage, having not been completed until 2003).
Those concerns were amplified by state media reports of non-critical parts of the dam becoming slightly deformed’, although the main structure was said to be intact. Its collapse would be a disaster not only in human terms for the millions of people who live downstream, but also the Party. Its flood gates have had to be raised repeatedly to ease the pressure — and again three times this week ahead of a renewed surge in floodwaters expected on Friday — but so far, so good.
None the less, the impact on agriculture is being reflected in the pick-up in inflation in July as food prices rise. More than two-thirds of China’s rice is grown in the Yangtze basin, and this year’s crop would have been near to harvest when it was flooded.
Authorities have been releasing crops from strategic reserves both to ensure adequate supply and to keep a lid on inflation. This includes more than 60 million tons of rice, 50 million tons of corn and more than 760,000 tons of soybeans, surpassing the volumes released during the whole of 2019.
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.
Caution should be exercised in interpreting China’s newly published trade and inflation figures for January. Next week’s New Year holiday will have caused distortions. Importers and exporters will have tried to get as much business as possible done before work stops for the holiday. In addition, the timing of the festival, which fell in January last year but this month this, will have made year-on-year trade growth appear stronger and inflation weaker. A clearer picture will appear after February’s trade and inflation figures are published in March and the first two month’s numbers can be compared in aggregate.
With that those caveats, on the face of it, the numbers suggest that the calendar year has started with solid growth both in China and abroad. Exports rose a greater than expected 25% from a year earlier, the fastest pace since April 2011, and up from 14.1% in December. Imports increased 28.8%, more than four-times December’s 6% rise. The boom in imports trimmed China’s trade surplus to $29.2 billion in January, from $31.6 billon a month earlier. Inflation also receded, slowing to 2% from 2.5% in December, though food prices spiked.
Another clutch of monthly economic indicators confirm that the slowdown in the economy is done. Factory output, up 10.1%, and retail sales, up 14.9%, hit eight-month highs in November. Even the uptick in inflation to 2% can be read as a sign of recovery. It seems that policymakers’ holding of their nerve through the slowdown and not over-stimulating has borne fruit in a rebound with benign inflation. Monetary and fiscal policy is likely to continue as is for now. Growth for the year is likely to come in comfortably if not excessively above the official target of 7.5%, which will set the pace for 2013 and subsequent years.
Consumer price inflation in China is now down to its lowest level in almost three years. October’s consumer price index rose 1.7% year-on-year, compared to September’s 1.9% and August’s 2%. The deceleration last month was more rapid than expected on the back of weaker food prices. Policymakers now have more scope to spur growth should they chose to do so, though the central bank has been using open market operations as its main way to reverse the slowdown of the economy. The liquidity it is injecting can be swiftly withdrawn if inflationary pressures resume, a lesson learned from the inflation spike that followed the massive stimulus package introduced after the 2008 global financial crisis and which has taken it a long hard slog to bring down.
Central bankers are not noted as being wide-eyed optimists at the best of times. China’s are living up to the stereotype. The world’s investors are regaining some of their animal spirits on the strength of new signs that the slowdown in China’s economy is at last ending, but China’s central bankers are striking an ultra-cautious note in their third-quarter monetary policy report.
They warn that global demand could slump again unless the crisis in the euro zone is sorted out, sending the world into a double-dip recession. As for China’s part of the world economy, ‘the foundation of an economic recovery is not yet solid”. The People’s Bank of China’s policy focus will emphasize growth, but monetary policy will remain “prudent”.
The central bank fears that measures to promote domestic consumption are potential inflationary, even though inflation is subdued despite rising energy prices and labour costs. Year-on-year consumer price inflation was 1.9% in September, down from 2% the previous month.
No mention of further cuts in interest rates or banks’ reserve requirements. Playing with the short-term liquidity taps, as was done with the $60 billion injection into the money markets earlier this week, is the sort of open-market operation the central bank now prefers to “fine-tune” the economy, regardless of the risk of more volatile short-term interest rates. It is a way to talk tight but act loose, and still be able to switch back to acting tight at short notice.
Consumer price inflation ticked down again in September, being 1.9% year-on-year, down from August’s 2%. That was much as expected and leaves inflation running well below the official target for the year of 4%. Officials have been signaling 2.7% as the likely number for the full year.
That would still appear to leave policymakers plenty of headroom for further easing of monetary policy, should they choose to use it. The central bank has cut interest rates twice since June and lowered banks’ required reserves three times since November. Yet its main way to pump up sagging growth has been to open the liquidity taps. The broad measure of the money supply, M2, grew by 14.8% in September, its most rapid monthly expansion since June last year, and above the central bank’s 14% target number for the year.
However, the liquidity taps have been opened cautiously and with some trepidation by the central bank. Zhou Xiaochuan, governor of the People’s Bank of China, writing in the latest edition of the Journal of Financial Research, a house organ of the bank’s, is talking of closer to home when he warns of the inflationary risks in the efforts around the world to shore up the sluggish global economy by easing monetary policies. He encouraged central bankers to be ready to start mopping up operations.
At home, property prices are resurging, propelled by the increase in liquidity. Policymakers have fought a two-year-long battle to deflate the property bubble without bringing down the whole house of cards. They will not readily throw that hard-won victory to the winds. With third-quarter GDP growth figures due on Thursday, we’ll get a sighting of how much of the headroom that falling inflation has provided, the central bank has a taste for.
July’s monthly economic indicators now starting to be published show clearly that the hoped-for bottoming of China’s growth slowdown has yet to materialize. Both industrial output and retail sales growth slowed in the month, to 9.2% from 9.5% and to 13.1% from 13.7% respectively. That will add to the pressure on policymakers to increase the stimulative measures they have been taking. The fall in inflation to a 30-month low at 1.8% year-on-year gives them more headroom to do so.
Update: the unexpectedly slight 1% increase in exports in July is further evidence.
The economic indicators we are expecting to provide the context for this week’s surprise quarter percentage point cut in interest rates by the People’s Bank of China are starting to come in. Among the first to arrive is consumer price inflation. At 3% for May, it is at its slowest monthly growth rate in two years, and down from April’s 3.4%, resuming the decline from last July’s 6.5% peak. The producer price index fell to 1.4% in May, confirming the global weakening of demand.
Both falls provide the headroom to cut rates without rekindling inflationary expectations. The cut in retail gasoline prices also announced this week was insurance. At least one more round of cuts to the banks’ reserve ratios followed by another modest interest rate cut seems likely for later this year.
Update: Industrial output in May ticked up by 0.3% from April’s 9.3% growth rate while fixed-asset investment, up 20.1% year-on-year, showed its third consecutive month of slowing growth and retail sales grew by 13.8%, down from April’s 14.1%. In short, plenty of evidence to support the shift of policy from reducing inflation to promoting growth. Zhuang Jian, an economist with the Asia Development Bank, summed up policymakers’ dilemma when he told state media:
Relying on investment to pull growth will have an immediate effect, but it will have negative repurcussions if not used rightly, while the consumption driver, though carries long-term value, is slow to boost economy.
April’s consumer price inflation numbers released Friday follow weak trade and industrial production figures that all point to the slowdown in China’s economy continuing. The question is whether that slowdown is running to plan, or whether it is slowing more rapidly than the authorities would like, and thus requires a policy response to stimulate growth.
Outside commentators are leaning increasingly towards expecting that given the recent sets of monthly economic indicators, particularly those for inflation. The consumer price index (CPI) came in at 3.4% for April, down from March’s 3.6% and below the government’s 4% target for the third consecutive month. Yet, to this Bystander, the central bank’s warning earlier this week that inflation is falling but not yet stable suggests authorities will continue to be cautious about loosening monetary or fiscal policy.
The chain reaction that would cause a hard landing to the economy is a property bubble burst causing the local government debt bubble to burst, triggering a banking crisis, triggering a financial crisis, triggering an economic crisis, triggering a social crisis. Managing down the property bubble, as the first line of defense, has been the policy priority. It has has some success in lowering home prices and reining in speculative building. Year-to-date property investment, at 18.7% is down from 34% in the same period a year earlier. But that growth rate still shows how much more there is to do.
If that doesn’t provide policymakers with reason for caution, then the suicide bombing of a government office in Yunnan earlier this week over an allegedly uncompensated land seizure, unusually prominently reported if only the most dramatic of increasingly common violent protests over land evictions, provides them with a stark and tragic reminder of what lies at the other end of the chain if the property bubble isn’t let down in a controlled way.