International | Feb 26 2009
By Chris Shaw
Recent data on the Chinese economy suggest conditions are now “less bad” than had been the case towards the end of last year. This is making some in the market increasingly confident a recovery is in fact under way. The recent gains in China A shares tends to support such a view.
According to Morgan Stanley, GDP growth in China this calendar year is expected to be in the order of 5.5%, with the year-on-year growth numbers taking on something of a “V” shape. This means conditions are likely to get worse before they get better, in the broker’s view. It notes after a sharp deceleration in the second half of last year, growth in the first two quarters should be weak before a recovery in the second half of the year (on the basis of weak growth figures in the second half last year).
Looking at the growth outlook from a perspective of sequential quarter-on-quarter numbers however, the broker sees a “W” shaped recovery as most likely. It expects 1Q numbers may be stronger given some normalisation of trade finance and as de-stocking runs its course, but this is merely seen as something of a technical rebound.
Given economic headwinds remain, the broker expects a subsequent fall-off in growth in the June quarter and a bottoming in the September quarter. This should then be followed by an acceleration in the final quarter of the year as the stimulus package begins to impact on activity.
Two factors support its view of a pick up in activity in the latter half of the year. The first is stronger bank lending figures from both December and January. Morgan Stanley sees this as sustainable over the course of 2009. Secondly, the broker expects G3 economic growth will bottom in the September quarter of this year before a weak recovery commences in the final quarter.
A recovery in the G3 economies is seen as key. Morgan Stanley suggests the Chinese Government’s stimulus package will boost activity levels, but a sustainable turnaround in the economy will require an improvement in the G3 economies. As such, the broker is forecasting Chinese GDP growth of 8% in 2010, although it sees year-on-year growth moderating by the end of next year to something around the 6-7% range. This should be sustainable longer-term in its view.
External factors pose some risk to China’s investment and export-led growth model, as a longer than anticipated global recession increases the chances of capacity cutbacks. This would then generate a capex shortfall. If the US economy doesn’t return to positive growth in 2010, a further stimulus package will likely be required in China to deliver economic growth in line with levels the government desires.
Longer-term, there remains a likelihood China attempts to rebalance its economy by moving from its current investment and export driven economy to a consumption driven model. Morgan Stanley notes this implies a lower sustainable growth rate, simply because such a model cannot generate the same level of productivity growth as an economy driven by investment and exports.
There remains some scope for a “Goldilocks” or best possible outcome where Chinese growth rebounds quickly. Some argue such a process is already under way as the government looks to restore confidence by boosting stock market valuations.
While it remains too early to call such a turnaround, Morgan Stanley points out if this was to be the case, its estimates would likely turn out too low. This means growth would likely average more than 5.5% for the full year.
Regardless, the aggressive policy measures introduced by Chinese authorities leads the broker to suggest China will be among the first of the major global economies to recover from the current downturn.
