Coverage: China is worried about growth; should we?

The Chinese government is relaxing its lending standards in order to push economic growth as the global economy continues to struggle. The biggest question is how worried should we be at this point.

The New York Times story by Keith Bradsher pointed out that the global economy isn’t doing anything to help the Chinese stimulate growth:

China signaled fresh concerns about its slowing economy as the country’s central bank moved on Wednesday to stimulate growth by freeing up more money for banks to lend.

The action reflects the growing uncertainty in the global economy. Central banks around the world are grappling with how to respond to falling oil prices, low inflation, volatile currencies and tepid demand.

In recent weeks, India, Australia, Singapore, Canada and Denmark have all turned to monetary tools to address weaknesses in their economies. The European Central Bank last month unleashed a major stimulus program aimed at stoking a return to moderate inflation and rekindling growth.

China is dealing with a slowdown, as its economy last year grew 7.4 percent, its lowest rate since 1990. Real estate and heavy industry, like steel production, have been the biggest brakes on the country’s growth. Real estate prices have been gradually falling since last spring, and while the pace of the decline has begun to slow, construction has lost momentum. That has contributed to a sharp drop in steel prices in China in the last several weeks. While the drop to some extent reflected the halving of iron ore prices last year, the price decline was also a warning sign of very weak demand.

Lingling Wei wrote for The Wall Street Journal that earlier stimulus measures didn’t have the desired outcome:

The latest step also highlights how fears about growth are trumping concerns that earlier stimulus measures helped heavily indebted industries and the country’s heady stock market but failed to lift areas that nurture demand and consumption, such as small businesses.

The People’s Bank of China, the central bank, has insisted on targeted efforts rather than broader moves like Wednesday’s. Before the measure was announced, the bank’s Shanghai branch said the PBOC wouldn’t relax credit too much.

But increasingly, the PBOC is acceding to demands from the Beijing leadership to reduce financing costs for businesses, according to Chinese officials and advisers to the bank. “This is the start of an easing cycle,” said one Chinese central-bank official in a recent interview.

The question now is whether Chinese consumers and companies will take advantage of these new efforts or hold fast amid further signs of slowing growth.

“We don’t have any plan to expand our business and are definitely not going to borrow from banks,” said Guo Liyan, owner of Jiangyin Heyuan Textile Co., a maker of textiles for jeans and other garment in the eastern province of Jiangsu, in an interview late last year. “Business is not as good as before, though unlike my neighboring companies we are still alive. We’re better off keeping things like they are now.”

The Reuters story by Kevin Yao and Judy Hua said the manufacturing sector was a drag, causing the government to reverse its previous guidance of letting growth slow:

Officials had previously said they would wait for fourth quarter data to be released before deciding on further easing measures, and that data gave little cause for comfort.

An official survey of China’s mammoth factory sector, the purchasing managers index (PMI), showed it shrank unexpectedly for the first time in nearly 2-1/2 years in January, and other indicators have also been worrying, including signs of strengthening capital outflows and a weakening in China’s service sector.

“The main reason was that the PMI was much lower than expected in January, so if there is no further policy reaction, it’s very likely that China’s Q1 GDP growth could fall below 7 percent,” said Liu Li-gang, an economist at ANZ.

Policymakers had previously signalled that they were comfortable with slowing net growth in the name of economic restructuring away from capital-intensive manufacturing toward services, but if restructuring attempts set off an economy-wide slide, Beijing would find its options increasingly constrained.

External factors contributed to the timing of the decision, economists said, such as deflationary pressures from a recent collapse in energy prices and easing moves by other foreign central banks, though domestic issues were still more important.

The Chinese government is used to having an economic engine that is immune to the rest of the global economy. Now that dropping commodities prices are causing growth to slow, the rest of the world is taking note. What these stories don’t mention is the amount of foreign debt that the Chinese government holds. If it is spending more money to stimulate the economy, then that’s less for debt purchases. While it’s likely not going to cause issues now, it’s definitely something to watch.