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Data May Confirm China Role as Global Growth Engine

Sunday, 06 May 2012 07:44 PM

With the United States struggling through a soft patch and Europe battling recession, China may come to the rescue by demonstrating a resilience that would provide comfort in a sea of economic uncertainty.

China, the world's second largest economy, is looking ever more vital to maintaining global economic momentum, and a raft of data to be released this week is expected to provide fresh evidence that its economy bottomed in the first quarter and is starting a gradual turn upwards.

China posted its weakest growth in nearly three years in the first quarter, with gross domestic product expanding 8.1 percent. The slowdown in growth coincided with deteriorating economies in the euro zone and the United States, China's two largest trading partners.

That combination stoked concern that China, too, could weaken, frustrating a shift away from export-driven growth toward domestic consumption, which economists view as essential to putting the global economy back on a solid growth path.

China's growth has from China is even more important after mixed data from the United States in recent weeks, highlighted by a disappointing jobs report for April. Job growth slowed to 115,000, the third straight month of deceleration.

In Europe, business activity took a turn for the worse last month and the elections in France and Greece and Spain's struggles to resolve its banking problems have driven up political uncertainty over the direction of the euro zone.

In contrast, manufacturing data for China perked up in April, suggesting China's slowdown could be easing.

Justin Lin, chief economist of the World Bank, remains confident Beijing can engineer a soft landing thanks to a high level of technology investment, which should raise labor productivity, lift incomes and shift growth toward consumption.

"I think China can maintain 8 percent growth," Lin said on Friday.

The view is widely shared by investment bank economists. "We believe China's economy is showing modest signs of recovery," said Standard Chartered in a client note.

Kenneth Rogoff, an economics professor at Harvard University, is more cautious, saying that China relies excessively on investment to drive growth.

Investment constitutes almost half of China's GDP, twice the global average, driven by huge intervention in the financial system, which lowers borrowing costs while depressing returns for savers, Rogoff said in a paper on the Project Syndicate website.

Fixed asset investment has underpinned China's economy as export growth has wilted, though government action to crimp the speculative real estate bubble it has fueled is beginning to bite. As a result, April data is likely to show a further easing of activity when the numbers are published on Friday.

Analysts at Citibank estimate 20.4 percent growth over year-ago levels, below the 20.9 percent rate in the first quarter, and they say it could be the third quarter before China's economic rebound gains real traction.

Rogoff argues the investment drive is unstable and that allowing its currency to float more freely would help smooth China's rebalancing. "China's economy is still plagued by massive imbalances and moving to a more flexible exchange rate would serve as a safety valve and shock absorber," he said.

But Beijing is showing little sign of heeding calls to move any faster on its currency after economic talks last week with the United States, when U.S. Treasury Secretary Geithner repeated his bid for a more flexible exchange rate. In an article in the country's official newspaper, a leading China research agency said the yuan was well valued right now.



China's trade numbers due for release on Thursday could further support its argument that the yuan's value no longer gives it an unfair advantage on world markets. The report is expected to show a modest trade surplus of about $10 billion, according to China's commerce minister, Chen Deming.

That would be roughly double March's $5.35 billion, but down dramatically from a year ago and insufficiently strong to indicate a rebound in foreign demand for its exports is propelling China forward.

"Chen's comment indicates that exports will be weaker than normal in April, which augurs poorly for second quarter sequential growth, typically the year's fastest growth quarter," said Tim Condon, ING's head of Asia research, in a client note.

Still, analysts in a Reuters poll forecast that China can achieve 8.3 percent GDP growth year-on-year in the second quarter and 8.4 percent for 2012 as a whole.

The United States releases March trade data on the same day. The U.S. trade gap is forecast to widen to $50 billion from $46 billion as a pick-up in retail sales lifted imports and oil prices rose.

China's retail sales, due on Friday, also may have ticked higher to 15.5 percent year-on-year from March's 15.2 percent level, continuing a gentle upward trend.

"Urban and rural per capita income has been increasing faster than GDP so far in the year, which would support consumption growth in a low inflation environment," Citi said.

Consumer and producer price inflation data the same day are expected to show a further softening of price pressures, with food costs likely declining month on month to help cap the annual CPI rate at 3.4 percent, according to UBS.

This would provide further room for Beijing to support growth by lowering its reserve ratio requirements for banks, already cut by 100 basis points in recent months.

"We continue to expect two 50 basis point RRR cuts before year end including one in the second quarter to stabilize liquidity," Bank of America/Merrill Lynch said in a client note.

UBS forecasts that lending data due out this week will decline to 780 billion yuan ($124 billion) in April versus the 1.01 trillion yuan in loans extended in March, which would add to the argument for a further easing of rates.

© 2020 Thomson/Reuters. All rights reserved.

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Sunday, 06 May 2012 07:44 PM
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