China Growth to Stay Weak for Several Years: Credit Suisse

Economic growth in China is widely expected to pick up momentum after bottoming in the second quarter of this year, but Credit Suisse warns that the world’s second largest economy could experience “several years” of weak growth on declining private sector investment and corporate profits.

  The investment bank on Thursday downgraded its economic growth forecast for China to 7.7 percent for 2012, from 8 percent predicted earlier this year. The economy grew 9.2 percent in 2011.

“Growth momentum is moderating, corporate profits are falling and the economy is facing a big challenge. (While) the government has launched a series of pro-growth measures, the economy is not out of its weakness,” Tao Dong, Chief Regional Economist for non-Japan Asia at Credit Suisse said in a note.

“We expect China to be in a weak growth cycle for the next several years featuring a weak credit cycle, weak export cycle and weak property cycle,” he added.

On Wednesday an influential government adviser said that China’s economic growth in the second quarter could come in below 7 percent, if there are no significant improvements in economic data for June. Analysts forecast, in a Reuters poll in May, that China would deliver its weakest quarter of growth in three years in the second quarter at 7.9 percent, but would end the year with GDP expanding 8.2 percent.

However, Dong doesn’t see economic momentum picking up soon. He says the recent monetary easing that has allowed for more bank lending will not help due to weak investment demand from the private sector. “Further cuts in interest rates may not be very effective in stimulating investment. As businesses struggle with over-capacity and weakened demand, the incentive to conduct investments is low,” Dong said.

Earlier this month, China cut the benchmark interest rate by 0.25 percent to 6.31 percent – its first such move since 2008.

“On the fiscal front, the planning agency has moved on the fast track the approval of local infrastructure projects. That should help ease growth concerns in the short run, but we suspect the investment momentum could fade quickly once the central government’s funding is used,” he added.

 

Deflation Threat? 

In addition to downgrading its growth forecast, Credit Suisse also lowered its outlook for consumer price inflation for 2012 and 2013. “In China, the risk of deflation is emerging and we have revised down our CPI inflation forecast to 3.1 percent for 2012, from 3.7 percent and to 2.3 percent for 2013, from 4.5 percent,” the bank said in the note.

On the manufacturing side, Dong says the recent fall in input costs, which indicates that corporates (sellers of raw materials) have been losing pricing power, is another sign of an “emerging deflationary force.”

The input price index in the PMI (Purchasing Managers Index) survey dropped by 10 percentage points to 44.8 in May. A reading above 50 indicates expansion from the previous month, while below that indicates contraction. 

If prices continue to fall, he says “corporate profit margins will get squeezed, cash flow will become more difficult to generate, and the risk of seeing the debt-chain break down will likely increase,” he said.

 Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae