News Review: A Paradigm Shift In China’s Economy?

In today’s China Money Network, our host Nina Xiang reviews the most important investment news of the week.

Listen to the complete interview in the audio podcast, or read an excerpt below.

Goldman Sachs/Gaohua cuts their growth forecast for China’s economy to 7.6% from a previous 7.9% this year. It also cuts forecast for 2013 down to 8% from 8.5% previously. It cites a number of reasons for this cut: modest policy easing, upcoming leadership transition; weaker external demand and structural challenges. Other investment banks, including UBS, Barclay’s and Chinese banks, have similarly cut Nina XiangChina’s growth this year by half a percentage point to around 7.5% from a previous level of around 8%.

– One major cause for this downgrade is that the Chinese government hasn’t stimulated the economy as aggressively as people were projecting. During the past couple of months, banks have been predicting multiple cuts of Chinese banks’ reserve ratios and interest rates. But the last time China’s central bank lowered reserve ratio was in May, and it has only lowered rates twice this year so far. Of course, it can still happen during the next few months, but any policy stimulus won’t be reflected in the economy right way. In addition, a weak US economy and the debt crisis in Europe have hit China’s export industry quite hard. A survey by Reuters shows that August export growth might be as low as 3 percent year on year. If true, that would be the weakest August since 2009 during the depth of the global financial crisis.

Inflation data released yesterday also shows that consumer prices are picking up again, with CPI up 2% year-on-year. Inflation pressure is likely to keep elevated during the rest of the year, making China Central Bank more cautious about any monetary loosening.

2012 might be the year of paradigm change for China. Last time China’s economy grew around the level of 7.5% was 13 years ago in 1999 and 1998 during the Asian financial crisis, when economy grew 7.6 and 7.8% respectively. Many agree that this time around, the slowdown is caused more by internal and structural challenges than external shocks. An investment-fueled growth model might be nearing an end.

– China still has plenty of financial resources to arrest any undesired further deterioration. During this town turn, China has mostly used fiscal measures to provide piecemeal stimulus to the economy. Just last week, China’s national development and reform commission approved 21 infrastructure projects, including over 2000 kilometers of roads, numerous ports and oil pipes. The government has lots of money to make more of such infrastructure investment to boost growth.

– Japanese investment bank, Nomura, estimates that there is a one in three probability that GDP growth will drop to an annual average of 5% or even less before 2014. A footnote: Nomura’s base case estimate is for China’s real GDP growth to average around 8% from 2012-2014.

– S&P issues a report about China’s metals and mining sector. As the world’s economy and China’s economy slow down, China’s own metals and mining sector will likely suffer as well. S&P predicts that softening demand, falling commodity prices, overcapacity and high cost production would negatively impact the whole sector until the end of 2013.

– For China’s steel sector, S&P believes that profit margins will shrink for the next couple of years. Demand for steel is growing at 4% to 6% this year, lower than China’s economic growth. And as the property sector cools, it is cutting harshly into steel demand. Fifty percent of China’s steel demand comes from the property sector. Also, China’s steel industry suffers from chronic overcapacity. S&P’s own estimate is that overcapacity level is about 10% to 25%. Together with a slowdown in infrastructure investments, S&P is very bearish on steel. And this of course also affects finished steel products, iron ore and coking coal.

– S&P is bullish on China’s oil and gas industries. Fundamentals for Coal is strong. Currently, coal takes 70% of overall energy usage, and it will decline to 63% by 2015, though still well above 50%. China is already the world’s second largest importer of crude oil, and it will only import more in the future. Its domestic production is growing at 0.3% so far this year, while its consumption has raised 5.5%. The widening gap will force China to import more oil in the future.

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