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No Rebound by China Seen Anytime Soon

Analysts say it will take a while for Chinese growth to resume its previous pace, despite the government’s stimulus efforts.

Recent economic news coming out of China has many investors wondering what measures Beijing will take to halt the slowdown of the world’s second-biggest economy. Industrial profits have declined for four straight months through July, the National Bureau of Statistics has reported. The statistics bureau also said this week that industrial value-added output for August expanded at its slowest pace in more than three years. Separately, China’s own official purchasing managers’ index showed manufacturing actually contracted in August for the first time in nine months. Prices for many basic materials, including steel, continue to slide, with further declines anticipated in the fourth quarter.

Limited and highly targeted actions may be the answer. Last week, the National Development and Reform Commission announced the approval of dozens of infrastructure projects valued at more than 1 trillion yuan ($157.8 billion), including 25 new urban rail transit and intercity rail line projects, which will require total investment of more than 800 billion yuan over eight years.

“It’s a fight to keep China on an even keel,’’ said Jonathan Anderson, president of Emerging Market Advisors in Beijing, in an interview with Institutional Investor. “Nobody is looking to accelerate China to 9 or 10 percent growth.’’ China has targeted headline GDP growth of 7.5 percent for 2012, down from growth of 9.3 percent last year, a goal that Anderson finds achievable, as the economy stabilizes in the fourth quarter. China’s GDP grew by 7.6 percent in the second quarter, the slowest pace in three years.

For the better part of a decade, China’s leadership has been touting the need to rebalance the nation’s economy. China’s investment-driven growth has led to misallocation of resources, inflated property prices and periodic gluts in sectors ranging from steel, cement and construction machinery to solar panels and household appliances. That has come at a heavy cost to the country’s depositors, who have been effectively taxed by low interest rates that often fall below the level of inflation to fund cheap credit, primarily for China’s state-owned enterprises.

Beijing’s four-trillion-yuan stimulus program launched in 2008 during the darkest hours of the global financial crisis, and the flood of bank lending that followed, exacerbated many of these problems. The share of China’s GDP derived from infrastructure and other public and private capital investment peaked at 49 percent in 2011 — far higher than peak levels in Japan or Korea, according to calculations by Nomura International. In March Chinese Premier Wen Jiabao again cited the need for economic restructuring, saying it had become “more urgent” to “solving the problems of imbalanced, uncoordinated and unsustainable development.’’

It’s hardly surprising, then, that China’s leadership has taken a cautious approach to rolling out fresh stimulus measures in the face of worsening economic conditions. On September 3 People’s Daily, the Chinese Communist Party’s flagship newspaper, said in a front-page editorial that even though lower economic growth may persist, the country should take the opportunity to address long-standing ills, while building up its arsenal of policy initiatives to spur growth in the future.

“Rebalancing is happening,” explained Zhiwei Zhang, China chief economist for Nomura. “Investment is slowing down and consumption is holding up fairly well.” During the first six months of the year, when China’s GDP grew by 7.8 percent, consumption growth provided 4.5 percentage points, while investment growth added 3.9 percentage points, according to Nomura’s calculations. Net exports subtracted 0.6 of a percentage point from the total. That represented a sizeable shift from the first half of 2009, just ahead of China’s massive fiscal stimulus, when investment contributed 6.2 percentage points to GDP and consumption added 3.8 percentage points. “It’s positive in the long term that the government is allowing growth to slow down,” Zhang said. “But in the short term, it is painful.”

(This week, Zhang revised down his GDP forecast to 8.1 percent from 8.2 percent but maintained that economic activity would rebound sharply in the fourth quarter.)

Measures to boost the economy, when they do arrive, are likely to involve not only directed investments to key building projects but also monetary easing, analysts say. In May the People’s Bank of China lowered the bank reserve requirement ratio, or the amount of cash set aside as reserves, to 20 percent. It was the third cut since November, but the required reserves maintained by China’s commercial banks remain among the highest in the world. In June China’s central bank also started reducing interest rates for the first time in four years. More cuts are anticipated.

Complicating the rollout of any stimulus measures is China’s generational leadership transition, which is expected to be announced at the 18th Communist Party Congress in October.

Short-term fixes notwithstanding, the country’s larger structural problems will take more time to remedy. “The Chinese economy is hitting a down cycle,” Dong Tao, Credit Suisse Group’s managing director for non-Japan Asia economics, said in an interview. China is entering an L-shaped period, he expects, with countercyclical measures acting to extend the big cycle, yet without the heft to create sustained upward momentum. “It’s a period in China we haven’t seen in a long time,’’ he said. “But it’s still not the hard landing that many are expecting.”

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