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China not out of the woods yet

Publication Date : 30-10-2012


Over the past three months, things have started looking up for carpet exporter Shijiazhuang Artweaver.

Its exports, half of which go to Europe, recovered to last year's levels - after falling nearly 15 per cent in the first half of this year - as new orders came in.

And the company of 50 staff in northern Hebei province found its cash flow easing, after the local authorities started refunding exporters' value-added taxes promptly.

"It used to take six months for the refunds to reach us," said Artweaver chairman Xu Wenbin.

"But after Premier Wen Jiabao pledged more support for exporters, there has been an obvious improvement."

Still, that is not enough for him to see a clear rebound yet.

"We are still moving at the bottom of the curve, things are not getting worse but they aren't getting visibly better either."

This ambivalence among Chinese companies and analysts continues even as the first green shoots took shape in last month's data.

A pick-up in industrial profits, production, retail sales and investments last month has convinced many that the worst is over.

"The market could be tentatively relieved from its overbearish view on the possibility of a hard-landing scenario," noted Mirae Asset Securities economist Joy Yang.

China's third-quarter gross domestic product fell to a three-year low of 7.4 per cent from a year ago. But on a quarterly basis, its 2.2 per cent rise was the highest in four quarters.

So the debate rages on about where last month's growth spurt will lead. Is it a U-shaped recovery - a gradual decline followed by gradual rise?

Proponents argue that China has already bottomed out. It will rebound in the fourth quarter, and likely keep going next year, Ministry of Finance researcher Jia Kang told a Beijing conference last Saturday.

Others say it is more L-shaped: Yes, the economy is stabilising, but it may stay at a low level.

So its growth may look more like a horizontal line on a chart, according to Shanghai-based analyst Li Huiyong: "To lower overcapacity and financial risks, and do economic restructuring... may take three to five years."

What is clear is there will be no state-driven V-shaped bounce, like the one that helped China lead Asia and the rest of the world out of the 2008 financial crisis.

Then, the Chinese government launched a 4 trillion yuan (US$636 billion) stimulus.

This time, Beijing is treading more carefully ahead of a leadership transition starting on November 8.

Policymakers are avoiding aggressive easing, in case of destabilising effects like inflation spikes.

So "China is lagging behind other Asian economies in easing (through) monetary policy", said Yang, formerly an International Monetary Fund economist.

Still, China will have to count on government policy to engineer a turnaround, as other growth drivers, from trade to property, have yet to rev up in a big way.

Private enterprises are still largely reluctant to invest more, while real estate giants like China Overseas Land & Investment warned last week that "the worst time for the China property market is not yet over".

And exports may still be a drag on growth.

"The unexpected jump in September's exports was largely due to Chinese firms lowering prices to fill more Christmas orders, so they can meet their planned targets for this year," said International Business and Economics University professor Li Shimin.

"But export growth after this lacks momentum."

Those in the L-shaped camp are especially sceptical about demand trends after the Christmas gifting season and after excitement over Apple's iPhone 5 and newly launched iPad Mini - both produced in China - eases.

Exports will grow as much as 4 percentage points below this year's 10 per cent target, senior government researcher Li Yushi forecast last Thursday.

Next year could be "slightly better", but still below target, he told Reuters.

And the domestic market is not coming to the rescue just yet.

While retail sales climbed 14.2 per cent year-on-year last month, the most since March, this is still below the 18 per cent level in December last year.

Walmart, the No. 2 supermarket retailer in China, is not betting on a major surge in the next three years either.

It said last week it will open about 30 stores in China a year till 2015, half the annual average of 50 to 60 over the last six or so years.

Still, there are some bright spots. One is the rising Chinese exports to Asia, where interest rate cuts and monetary easing are driving up demand.

"China is being saved by Asia," said Yang, pointing to an 18.4 per cent rise in September exports, based on a three-month rolling average, to Asian markets like South Korea. This is up from 1.8 per cent in January.

Traders like Jenny Cui, 28, who sells hardware mainly to Seoul businessmen in the southern commodities hub of Yiwu, agree. "My main customer got more bank financing in July, so he raised his order by 20 per cent," said Cui.

But Asian demand cannot completely pick up the slack for China's two largest trading partners, the United States and Europe.

So it is back to Beijing for more policy support.

And enterprises like solar panel-maker Tianjin Yongming say they already have a brighter outlook. While business was slow at the start of the year, it has picked up in the second half, said its general manager Sun Ge, 42. "We've already signed contracts for four or five projects."

The upturn comes amid reports last week that Beijing plans to invest 70 billion yuan in solar projects to boost domestic demand and save the troubled sector.

Beijing has also sped up approvals of infrastructure projects this year, including the first subway line for Shijiazhuang, which the city had applied for in 2008.

On a broader level, the Baltic Exchange's main sea freight index, tracking rates for ships carrying dry commodities, rose early last week on stronger Chinese iron ore demand.

How long this will last depends on whether China can sustain its fixed-asset investment growth, which was up 20.5 per cent in the first nine months of this year.

Meanwhile, Beijing is helping some companies keep costs down.

One move is the cancellation of some Customs fees and the suspension of others this month, which could save exporters and importers an estimated 3.5 billion yuan.

Already, larger industrial companies' profits are on the rise.

Their net income rose 7.8 per cent last month for the first time in six months, official data last Saturday showed.

And China's factory output will accelerate in the fourth quarter, Ministry of Industry and Information Technology official Zhu Hongren told a press briefing last week.

His forecast may assure those worried that while a leading indicator of factory output this month rose to a three-month high, it is still in contraction territory.

In contrast, the service sector, at least for smaller companies tracked by HSBC, has been expanding.

For Tianjin-based software company 7Ginfo, turnover in the first three quarters of this year has already hit 7 million yuan, more than double its full-year level last year. "The economy is stabilising... it's not very optimistic yet," said founder Gao Yan, who sees the downturn as a way of weeding out weaker enterprises while innovative firms are encouraged by the state to flourish. "But overall, the situation is not bad."


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