The year of the doddering dragon

Will the slowdown in China’s economy endanger Kazakhstan’s?


China buys one-eighth of the oil and gas exported from Kazakhstan (11 million tons per year; Kazakhstan produced roughly 80 million tons per year in 2010 and 2011), according to Robin Paxton of Reuters. Since oil and gas exports account for roughly a fourth of Kazakhstan’s GDP, a slowdown of the world’s second largest economy could affect us substantially.

The Chinese economy is growing less rapidly. GDP in the second quarter of 2012 grew by the annual rate of 7.6%; the corresponding rate in the second quarter of 2011 was 9.5%. Similarly, GDP in the first quarter of 2012 grew at an annual rate of 8.1%, sharply below the rate of that quarter in 2011. In the world financial crisis of 2008-2009, the growth rate of Chinese GDP fell as far as to 6.6% (which is still twice the current rate of global economic growth). Apparently, GDP in Q1 of 2012 was less than 2% higher than in Q4 of 2011, but much of that change might have been seasonal. Finally, China’s economy may be reacting to the globe’s: The International Monetary Fund (IMF) estimates that recession in Europe may reduce Chinese GDP by as much as 4%, reports Rob Minto of The Financial Times.

Indirect indicators of GDP are also murky. On one hand, industrial production is rising at a healthy annual pace, well over 9%. On the other hand, production of electricity, steel and concrete (an indicator of China’s construction market, the world’s largest) is slowing or falling, noted Keith Bradsher of The New York Times. Fixed-asset investment is down sharply this year, and urban housing prices have been falling since late 2009. These trends suggest that the government recognizes that the economy already has excess capacity. In that event, the GDP slowdown may be temporary.


Easy does it


The Chinese slowdown does not seem likely to affect global oil prices as much as the Eurozone crisis will. The Chinese handled well the global crash of 2008 as well as the Asian currency crisis of 1998, and they have improved their management of inflation over the past 20 years.

A soft landing of their economy seems likely. After resisting interest-rate cuts for three years, the central bank -- The People’s Bank of China -- has cut them twice in a month, amid cooling inflation, reported The Financial Times. This year the Bank also reduced the share of deposits that banks are not permitted to lend out.

Half of the GDP growth of 2012 was in capital spending, which Beijing can stimulate by permitting local governments to invest, according to Nick Edwards and Kevin Yao of The New York Times. Private consumption is only just over a third of GDP, so fiscal policy can be relatively powerful. China’s small debt could enable a fiscal stimulus that packs a wallop: The national government’s debt share of GDP is 25%, as compared to 102% in the United States, wrote Bob Davis and Tom Orlik of The Wall Street Journal. (In China, the GDP share of local government debt is another 22%.)

On the other hand, the fiscal stimulus of 2009-10, which focused on infrastructure, increased the debts of local governments and stimulated inflation. The IMF recommends a stimulus to private spending – tax cuts and subsidies for consumption of durable goods, reported Minto. The private sector’s share of the economy may already be growing: 2011 wages were up by 18%, a bit faster than GDP (with no adjustment for inflation), noted Orlik. Disturbingly, an increase in private or public consumption would likely increase the credit-to-GDP ratio, which was 171% in 2010, up from 122% in 2008, said The Economist.


The IMF forecasts that China’s economy will grow by 8% per year for the next five years, noted Ian Johnson of The New York Times. That had been Beijing’s target rate since 2005 until it lowered it to 7.5% this March. Before the financial crisis of 2008-09, Chinese growth rates averaged over 10% per year.

Financial investors may overstate the Chinese slowdown, to judge from circumstantial evidence. Although emerging market economies are growing more rapidly than developed economies, a stock market index for the former performs worse than is average, reported The Financial Times. The MSCI stock market index for emerging market economies has lost 21.7% of its value in the past year. The global version of that index lost 10.7%. Conceivably, stock markets in emerging economies perform poorly because investors over-estimate the Chinese slowdown and its subsequent impact.


Dragon on a cigarette break


To some degree, the Chinese slowdown may be intentional. The overall saving rate in China is 51%, and Michael Pettis, a finance professor at Peking University, argues that China must increase consumption’s share of its economy in order to provide balanced growth. To do this, China must “get household income to rise from its unprecedentedly low share of GDP,” he wrote in The Financial Times. “This requires China to increase wages, revalue the renminbi and, most importantly, reduce the enormous tax that households implicitly pay to borrowers in the form of artificially low interest rates.” If The People’s Bank does not cut market interest rates as rapidly as the expected rate of inflation has fallen, then real interest rates will rise. China could also boost consumption by providing comprehensive health care, for which households today must save, remarked The Economist.

Chinese demand for crude oil remains at a peak despite the fall in the rate of GDP growth, said UniCredit. If Chinese growth slows to 8% per year, then this could directly reduce Kazakhstan’s GDP by .06 of one percent. Conceivably, the indirect impact on Kazakhstan may be more severe: Each change in Chinese GDP of 1% relates to a change in global oil prices of 10% to 30%, claims Ruchir Sharma of Morgan Stanley. Obviously the estimate could hold only for small changes in the size of the Chinese economy; a fall of just over three percentage points in GDP is not going to cut oil prices to zero.  The dragon is not that powerful. – Leon Taylor tayloralmaty@gmail.com



Notes

Chinese purchases of oil and gas directly generate about 3% of Kazakhstan’s GDP ((1/4)*(1/8) = 1/32). A Chinese slowdown of 2% could decrease our GDP by roughly (1/50)*(1/32) = 1/1600.


References

Jamil Anderlini. China cuts rates amid growth fears. Financial Times. July 5, 2012.

Keith Bradsher. Affirming slowdown, China reports second month of scant economic growth. New York Times. June 9, 2012.

Keith Bradsher. After barreling ahead in recession, China finally slows. New York Times. May 24, 2012.

Bob Davis and Tom Orlik. Beijing's growth tools are limited. Wall Street Journal. May 13, 2012.

Economist. How strong is China’s economy? May 26, 2012.

Economist. Not with a bang. July 28, 2012.

Nick Edwards and Kevin Yao. Hand forced, Beijing opts for old fix. Reuters. Published in New York Times. July 16, 2012.

Leslie Hook and Peter Marsh. Sany job cuts signal Chinese slowdown. Financial Times. July 4, 2012.

Ian Johnson. China’s growth rate slowed in the 2nd quarter. New York Times. July 12, 2012.

Rob Minto. IMF: Europe could hit China, hard. Financial Times. February 6, 2012.

Tom Orlik. Numbers show China’s still working. Wall Street Journal. May 29, 2012.

Robin Paxton. Update 3 -- Kazakhstan sees 50 pct oil export growth by 2020. Reuters. October 4, 2011.

Michael Pettis. A slowdown is good for China and the world. Financial Times. July 23, 2012.

Ruchir Sharma. China slows down, and grows up. New York Times. April 25, 2012.

Jochen Hitzfeld and Kathrin Goretzki. Weekly commodity outlook. UniCredit. July 3, 2012.

Wall Street Journal. Economists React: China GDP Growth Hits Three-Year Low. July 13, 2012.

Bettina Wassener. Slow first quarter in China, but recent signs of growth. New York Times. April 12, 2012.

Robin Wigglesworth. China slowdown fears overstated, says Mobius. Financial Times. July 27, 2012.