concern....

China in prospect 2009:

If it gets this bad, lock up your spoons and womenfolk

Even with the outlook for the world economy rapidly worsening, many economists are still relatively optimistic about the prospects for the Chinese economy next year.

While the International Monetary Fund recently lowered its forecast for 2009 real GDP growth to 5 percent, the World Bank is expecting 7.5 percent. This was also the consensus estimate of professional forecasters surveyed earlier this month by Frankfurt-based Dekabank. Wang Tong-san, a spokesperson for the Chinese Academy of Social Sciences, was even more upbeat at a recent press conference, telling reporters he expected 9 percent, or even a bit more, and putting the likelihood of this prediction at "better than 70 percent."

Speaking at the opening of the fifth US-China Strategic Economic Dialogue on December 4, China’s central bank governor Zhou Xiao-chuan sounded a more pessimistic note, however, warning that China must prepare for the “worst case scenario.”

While he didn’t elaborate, it’s easy to see what he’s worried about. If the sharp slowdown in exports and investment that is now showing up in the monthly statistics continues next year, the 8 percent growth believed to be necessary to keep unemployment under control will be difficult to achieve.
To answer the question of how bad things could get in 2009 we might start by considering a repeat of the net exports crash and fiscal stimulus that followed the 1997 Asia crisis as a base case. In this scenario, real gross domestic product growth could slow to as little as 4.5 percent. While in 1999, the worst Asia crisis year for China, growth only fell to 7.8 percent, the drop in net exports experienced 10 years ago would have much more severe consequences today because of the Chinese economy’s increased reliance on foreign trade.
The question then becomes how much the recently announced Rmb4 trillion fiscal stimulus package could boost GDP above this base-case level, which already includes the 1-2 percentage points such policies are believed to have contributed in 1999. National Development and Reform Commission Minister Zhang Ping has put the contribution from this stimulus at only 1 percentage point per year, implying no increase over our base case at all. And even the 2 percentage-point impact that many private-sector economists are looking for would at most raise this base-case forecast by only 1 percentage point. Thus 5.5 percent growth would seem to be about all that could be hoped for.
The problem, of course, is that now, unlike in 1999, the whole world is in crisis. Even 5.5 percent growth looks like more of a best case than a worst case scenario. In the worst case scenario, growth will be close to zero or even negative, which would have serious implications for employment and social stability.
Zero percentIn 1998, consumption accounted for 60 percent of nominal GDP (as calculated by the expenditure method); investment, 36 percent; and net exports, 4 percent. In 1999, these three components grew at 8 percent, 5 percent, and -35 percent, respectively, resulting in nominal GDP growth of 5.2 percent. (Real GDP growth was higher that year due to deflation.)
A rerun of those 1999 growth rates, but starting from the current GDP component shares—with consumption now accounting for 49 percent of GDP; investment, 42 percent; and net exports, 9 percent—would result in nominal GDP growth of only 2.9 percent. (The effects of a fiscal stimulus equivalent to the one in 1999 are captured in the ’99 consumption and investment growth rates as both include government spending.) Even if we also assume a repeat of the 1-2 percent deflation of the late 1990s, so that next year’s base case real GDP grew at, say, 4.5 percent, allowing for an additional one percentage point fiscal stimulus only gets you to 5.5 percent.
To expect something more than this, you’d have to believe that either the fiscal stimulus would contribute a lot more to growth than the NDRC says it will or that there will be a big turnaround in the world economy next year. As there is no reason to doubt the NDRC’s analysis of the stimulus package and all the evidence we have so far suggests that the global slowdown is worsening rather than abating, neither of these possibilities seems particularly likely.
On the other hand, plenty of downside is possible. Private sector investment, for example, could easily fall next year in response to the ongoing contraction in real estate and manufacturing and the excess capacity that has been evident for some time in sectors such as steel, cement, and auto manufacturing. (In 2007, Hebei Province alone produced 107 million tons of steel, more than any country except Japan.) Government investment will presumably grow rapidly as a result of the stimulus plan, but there is no guarantee that this can entirely compensate for a slowdown in the private sector.
Zero percent investment growth is certainly not out of the question and this would imply only 0.8 percent nominal GDP growth in our base case scenario. And if the GDP deflator next year were in the range of October’s 4 percent CPI inflation, real GDP would shrink for the first time since the beginning of the ‘reform and opening’ period in 1978. (The GDP deflator is a measure of inflation used to adjust nominal GDP growth for the effects of price changes.)


Asia Sentinel