Bulls running out of puff in China

PUBLISHED : Wednesday, 30 November, 2011, 12:00am
UPDATED : Wednesday, 30 November, 2011, 12:00am


Economists are getting their crystal balls out early this year, and the outlook for the mainland and Hong Kong is decidedly dimmer.

The mainland is heading for its weakest growth in a decade next year and Hong Kong will be caught up in the slowdown, which will be exacerbated by Europe's debt crisis and the United States' lacklustre economy, according to the emerging consensus among economists at investment banks and multilateral institutions.

In recent days, several economists have trimmed their already reduced 2012 growth estimates for the mainland and Hong Kong.

Goldman Sachs yesterday reversed a three-week old 'buy' call on H shares and the red chips of mainland firms, telling investors to cut losses because the 'balance of risks is no longer attractive' given China's 'challenging' economic outlook.

Morgan Stanley halved its forecast for Hong Kong, cutting next year's projected gross domestic product growth to 2 per cent from 4 per cent previously.

'There is only so much China can do to shelter Hong Kong from a global recession,' analysts Denise Yam and Ernest Ho wrote in a research report, citing a reversal of the city's previously buoyant domestic consumption as a main reason for its bleaker outlook.

'The labour market is poised to turn relatively sluggish in the quarters ahead as global growth continues to slow, which might prompt more corporates to downsize or freeze hiring decisions. All these are conducive to dampening private consumption growth ahead,' they wrote.

In the past two days, three banks have cut their growth projections for China. Morgan Stanley and Citigroup both cut their forecasts for growth to 8.4 per cent, down from 8.7 per cent previously. UBS yesterday lowered its forecast for next year to 8 per cent from 8.3 per cent.

If real growth is 8.4 per cent, it would be the slowest full-year rate of expansion in a decade. Compared with last year's 10.4 per cent growth, such a slowdown would feel like a recession to many ordinary Chinese.

An 8 per cent rate would represent the weakest expansion since 1999, when the economy grew 7.6 per cent as it shook off the after-effects of the Asian financial crisis.

'China's double-digit growth appears to be almost over and the next stop is likely 8 per cent,' Citigroup analysts wrote this week in a report.

'The euro area recession and US subpar growth are part of the painful adjustment, and will curtail China's external demand and intensify trade and currency-related frictions.'

Bank economists have grown increasingly pessimistic on China's growth prospects since global equity markets began to sputter in August.

Consensus forecasts for next year's growth fell to 8.5 per cent earlier this month, from 8.8 per cent in July, according to a Bloomberg survey of economists.

The biggest external drag on the Chinese and global economies continues to be the European sovereign debt crisis, which is still spreading.

German government bonds - previously in strong demand because investors viewed them as a safe haven - have started to come under pressure in the past two weeks as their yields have reversed direction, rising from record lows.

'Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed,' OECD deputy secretary general and chief economist Pier Carlo Padoan wrote on Monday.

Most economists expect Europe, China's biggest export market, to fall into recession next year, if it has not done so already.

'The much weaker euro-zone growth will affect the rest of the world, including China,' UBS analysts wrote yesterday in a report.

'Against this backdrop, the Chinese government has started to 'fine-tune' macro policy measures, and we think more obvious and persistent easing will likely occur in [the first quarter of next year], when export, construction and industrial production should have decelerated significantly.'