In the Year of the Snake, Challenges for the Chinese Economy

New York Times Deal Book By FEBRUARY 19, 2013, 12:54PM BY BILL BISHOP

 

China is back to work after a week long holiday to celebrate the Chinese New Year. Most business shut for the entire week and the scale of human migration was awesome. This year, the Chinese made 440 million trips during the lunar holiday.

Chinese people spend a lot of money during this period, shoot off a lot of fireworks and increasingly travel overseas. Retail sales in the period were $86 billion, up 14.7 percent from last year though the growth rate was down from 16.7 percent pace in 2012. The government’s frugality campaign may be to blame, as well as the increase in foreign travel. China UnionPay reported that overseas bank card transactions increased 33 percent from last year.

 

Firework sales were off 45 percent in Beijing this year. This was my seventh consecutive Spring Festival in Beijing, and while there were still a lot of explosions, the pyrotechnics were noticeably more restrained than in prior years. The good news is that “no deaths or cases of eyeball extraction were reported” in Beijing and fireworks-induced air pollution was relatively light.

We are now in the Year of the Snake. Snake years unfortunately may be bad for stocks. According to Sam Stovall, chief equity strategist at S&P Capital IQ:

Since 1900, the S.&P. 500 posted its only average calendar-year decline during the Year of the Snake, falling 3.8 percent, and rising in price just 33 percent of the time, which was the worst price performance and frequency of advance of all 12 years.

 

THE CHINESE STOCK MARKETS reopened Monday to a small gain but on Tuesday dropped the most in five weeks. The proximate cause of Tuesday’s decline was a report that Beijing is so concerned by the resurgent property market it may impose additional real estate restrictions between now and the annual meeting of the National People’s Congress in early March. The markets here have had a good run since December and a few of my punter friends have decided to take some profits.

 

This column has repeatedly noted the doubts about the reliability of Chinese economic statistics. Stephen Green of Standard Chartered has published a new report in which he questions the official gross domestic product data for the last two years. Mr. Green writes:

Our guesstimates for the past two years look considerably weaker than the official estimates: our guesstimates for 2011 and 2012 are 7.2% and 5.5%, respectively, compared with the official prints of 9.3% and 7.3%.

 

Most economists still seem to believe China’s G.D.P. growth rate is closer to the official figures. In early February, an official of the Reserve Bank of Australia gave a speech titled “Reflections on China and Mining Investment in Australia” in which he said that China’s G.D.P. growth has stabilized around 8 percent. Australia’s economy is heavily dependent on China, and the Australian central bank still maintains a relatively bullish view about China’s future demand for commodities.

 

The stakes are high, especially for economies like Australia that are heavily reliant on commodities exports to China. One observer argues that at least in the short-term, Chinese commodity demand will be strong, maybe not because the Chinese economy is “healthy” but rather because total lending in January 2013 grew 15 percent faster than it did at the peak of China’s credit boom in 2009.

 

PERHAPS THE MOST IMPORTANT CHALLENGE for the Chinese economy is how quickly it can rebalance from credit to consumption-driven growth. Michael Pettis, a Wall Street refugee who teaches at Peking University, has been one of the most prominent foreign voices on this topic. He has just written a new book, “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy,” and is now giving interviews on his book tour, including “weaning China off credit-fueled growth” and how to spot early signs of economic reform.

 

Eswar Prasad, a former International Monetary Fund official with responsibility for China, seems a bit more optimistic than Mr. Pettis about the rebalancing efforts and wrote on Tuesday that Beijing was making progress toward rebalancing:

New data suggest that it is time to revise the view that China’s growth is driven largely by exports and investment. Private and government consumption together accounted for more than half of China’s output growth in 2011-12, signaling a big shift in the composition of domestic demand. Physical capital investment, the main driver of growth over the previous decade, is no longer the dominant contributor to growth. As for exports, a shrinking trade balance has in fact dragged down growth these past two years.

 

In January, an “airpocalypse” across much of China led to plenty of hacking coughs, including for yours truly. But a different kind of hacking in China is noticeable in February.

 

BusinessWeek Magazine’s cover article last week was “A Chinese Hacker’s Identity Unmasked.” On Tuesday, The New York Times reported on its front page that “China’s Army Is Seen as Tied to Hacking Against U.S.” The Chinese government responded that it opposes the hacking allegations.

A week ago, President Obama signed an executive order about protection against cyber attacks, and according to The New York Times article, “The United States government is planning to begin a more aggressive defense against Chinese hacking groups, starting on Tuesday.”

 

The article does not specify what is entailed in a more aggressive defense, but if the United States wants concrete results then naming and shaming people and groups in China may be just one piece of a much broader response.

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