China: Slower recovery expected
This article was first published on September 6, 2012.
We are cutting China’s growth forecasts to 7.6% and 8.0% in 2012 and 2013 respectively, from 7.9% and 8.5%
previously, on several developments (see Exhibits 1 and 2):
 Weaker data: Current and leading indicators suggest that the economy has slowed again. Industrial output growth
softened as it continued to work through the excess capacity built over the last few years, while exports slowed and
property investment decelerated further. The significant slowdown of property investment and construction-related
activities, and more recently that of exports, have been the key factors behind the growth disappointment this year. We
estimate that August industrial production growth is likely to have fallen close to 9% yoy or below, compared to 9.2% yoy
in July.
 Tougher global backdrop: Export volumes worsened sharply in July after a reasonably strong upturn in 1H2012.
Leading indicators point to subdued expectations for new export orders. This, combined with our expectation of softer
global demand, has prompted us to downgrade our forecasts for export growth for the rest of the year and 2013.
 More cautious policy response than we earlier expected. The upcoming political transition and implementation lags
could delay new spending plans in the near-term. More substantively, the government is likely to be more cautious
about using large-scale infrastructure spending as a countercyclical tool. While monetary policy should remain
supportive and budgetary spending will continue to trend up, demand impact from large public investment is likely to be
more moderate. This policy scenario is controversial, however: given the downside risks to near-term growth,
and short of other cyclical tools, the government may still need to resort to investment spending to shore up
growth.
In addition, a set of broader issues will underlie shifts of the economic structure and affect growth in the next few
years.
 Demand structure: External vs. domestic. Exports remain soft, and the transition towards a sustained domestic
source of demand is slow. Consumer demand has benefited from income growth, but the savings rate will stay high for
structural reasons. Investment demand is likely to be more subdued due to the rise in capital intensity in the last few
years.
 Productivity gains, tradable vs. non-tradable: The transition towards a larger contribution of non-tradable sectors to
growth requires a range of reforms to unleash productivity growth and improve investment efficiency.
 Leverage development: Re-leveraging vs. de-leveraging: Balance sheet considerations could affect the corporate
sector more significantly than in the past, due to the slowdown in profit growth and rising debt.
 Policy crossroads, short-term vs. long-term. Infrastructure investment has been the primary policy tool during the
downturn, as interest rate and income policies tend not to be very effective or actively used in managing short-term
demand. Such investment, while quick in generating demand support, tends to imply long macro cycles. Links of this
type of investment to long-term growth are also being scrutinized.
In this light, consideration of the potential level of economic growth during the economic transition, policy tools and constraints,
and internal saving and investment structure will be critical to put China’s growth in perspective.