The news about the Chinese economy has been grim at best lately and conjures up the image of a slow boat. This has lead to what most economists and analysts agree is an appropriate response from the largest global banks as they are all cutting their growth forecasts for the world’s second-biggest economy.
The analysts downgrades will likely intensify investors’ concerns about fallout in the rest of Asia. Asia exports have been in a free fall from the euro-zone debt crisis and the weak U.S. recovery, while domestic growth also slows.
UBS on Friday lowered its forecasts for China’s GDP growth to 7.5% from 8% for this year, putting it among the most bearish of banks that have recently downgraded their 2012 China outlooks. For next year, UBS sliced its outlook to 7.8% from 8.3%.
That followed less than 24 hours after Goldman Sachs Thursday cut its forecast for this year’s growth to 7.6% from 7.9% and for 2013 to 8% from 8.5%.
China’s GDP grew 9.3% last year, so the expected slowdown doesn’t mean China’s economy is falling off a cliff, but it is still a significant slowdown.
The Chinese economy has a habit of beating expectations. For ten years from 2001 to 2010, its growth rate exceeded the IMF’s spring forecast, often by a big margin. But this year it looks like it will disappoint. In recent months, industrial output has slowed sharply; stocks of unsold goods are piling up; and Shanghai’s stock market is at a three-year low. For the first time this century, in 2012 China’s growth rate may dip below 8%. With the world ever more dependent on China’s economy this is a real problem and is what is part of the rationale behind the recent analyst downgrades.
The lower projections from the large banks for 2012 bring them closer to Beijing’s view, which typically underestimates growth.
Premier Wen Jiabao set this year’s official GDP growth target at 7.5% in a symbolic gesture to sharpen the country’s focus on the quality, rather than speed, of economic expansion. China had for the prior seven years set its growth target at 8%, though the economy outpaced that rate every year, even in 2009.
China’s central bank has cut interest rates twice this year and pumped liquidity into the banking system. The government has also been boosting spending on highways, subways and other infrastructure projects. The effort so far is a far cry from the massive stimulus program it unleashed in 2008.
Still, there are concerns that Chinese authorities might not offer enough stimulus fast enough to counter head winds generated from a policy clamp down on the property market that has also depressed activity.
Goldman Sachs said new spending plans may be delayed in the near term by Beijing’s once-a-decade leadership transition this year and lags in implementation.
Morgan Stanley figures risks in Asian markets have increased. Among the evidence, it notes leading indicators such as Chinese electricity usage, local cement prices, and freight rates, which suggest investment risks in Asia will remain elevated.