China: The Acceleration Of Deceleration
The outlook for China’s economic growth is getting worse, and two news items on Thursday January 8 underscore my concerns.
The first is reports that economic growth in Guangdong province – an economic hothouse adjacent to Hong Kong, housing the Pearl River Delta megalopolis – slowed to 10.1% in 2008 from 14.7% in 2007, with its export growth decelerating to 5.6% last year from 22.3% in 2007. A local academic was quoted as saying that Guangdong’s growth could even fall to 7.0% in 2009, or half its average over the past 30 years. The province’s deputy governor added that 600,000 migrant workers had headed home to inner China, confirming my belief that China could see a temporary reversal in urbanisation.
If the picture in Guangdong is repeated in China’s other core economic regions, then my belief that China will see a sharp slowdown in 2009 will prove correct. My colleagues at Business Monitor International and I have just revised down our forecast for Chinese growth in 2009 to 5.6% from 6.8%, which is below forecasts by Goldman Sachs (6.0%), the World Bank and Standard Chartered Bank (7.5%), and the IMF (8.5%).
For this reason, I see no reason to expect an appreciation of the Chinese yuan currency this year, and I now expect the yuan to depreciate by 1% to CNY6.9000/US$ by the end of 2009. The non-deliverable forwards market is also pricing in depreciation, confirming my view.
The second piece of potentially concerning news is that China’s Ministry of Commerce may ask local firms to seek official permission if planning to invest more than US$100mn abroad. The same directive also dropped a previous reference to encouraging Chinese companies to invest overseas. This suggests that the government wants Chinese companies to put China first.
It is also a sign that the government is concerned about financial outflows. The official Xinhua News Agency quoted the State Administration of Foreign Exchange as warning of ‘abnormal’ cross-border capital flows, which could exacerbate liquidity strains in China. Furthermore, China’s humongous foreign exchange reserves recorded their first monthly drop since December 2003 in the fourth quarter of 2008. Of course, China still has around US$1.9 trillion of reserves, which is theoretically sufficient to shield it from any crisis. However, as I have warned before, reserves are not always immediately deployable.