This week, China enters the “sanfu days†of the lunar calendar, similar to what are known in the west as the dog days of summer. Some areas of the country are battling huge floods, and the weather will most likely get worse before it gets better.
The same can be said about China's economy. The June trade data released on Wednesday was a huge disappointment as both imports and exports unexpectedly fell year over year. The decline in monthly exports was the first in a non-holiday month since the financial crisis.
Several economists wrote on Wednesday that the weak trade data could spur Beijing to devalue the renminbi, a move that would be problematic for United States-China relations. The topic is in focus as the fifth meeting of the U.S.-China Strategic and Economic Dialogue opened in Washington on Wednesday.
Economists reacted quite negatively to the trade data, and while several have recently cut their forecasts for economic growth, the new data could spur a new round of downward forecast revisions. A recent Morgan Stanley report included a slide titled “China ‘Super Bear' Scenario,†which discussed the possibility that growth in the nation's gross domestic product could slow to 5.5 percent later in 2013 and 4.5 percent in 2014. In its report, Credit Suisse wrote that “All the Main Drivers of Chinese Growth Are Sharply Diminished.â€
The full toll of the liquidity squeeze that hit China in June has yet to flow through the real economy. According to a Bloomberg News survey of economists, that squeeze “is likely to reduce credit growth this year by 750 billion yuan (about $121 billion).â€
Sentiment in and about the country seems to be more negative than I have ever seen it.
Bad macroeconomic news can often be positive for the stock market. On Wednesday the Shanghai composite was up the most in three months, apparently on hopes that the poor data would push Beijing to undertake policy actions to stimulate the economy.
A LOOK AHEAD AT NUMBERS
On Monday, the Chinese government will report how its second-quarter G.D.P. growth fared. The government does not appear to be panicking. “Macro controls should keep the economy's performance in a reasonable range, keep the growth rate and employment level from falling under a floor and keep inflation from rising above an upper bound,†Premier Li Keqiang said on Tuesday.
Barclays Capital recently coined the term “Likonomics†to describe the policies of Premier Li. The three pillars, according to Barclays, are “no stimulus, deleveraging and structural reform.â€
The Barclays report reflects the hopeful case for what is going on with the Chinese economy. In this version, the new leadership means it when it says, as it has repeatedly, that it is willing to tolerate slower, better-quality growth. And to achieve that better-quality growth, Beijing is engineering a slowdown, including intentionally causing the June interbank pain, as part of an overall plan to quicken long-discussed and much-needed structural reforms. The economist Stephen Roach is another vocal proponent of this view, as he laid out in a recent article for Foreign Policy.
The more bearish case argues that there is no serious plan, that the June liquidity tightness was unexpected, that the credit growth is so out of control that a crash is imminent. Both sides now agree that China faces at least a significant, near-term deceleration of growth.
What matters now is whether the leadership can tolerate the pain that has spread throughout much of the economy, and looks to get much worse, as overcapacity continues, domestic and external demand weaken, and debts come due. One test case may be Rongsheng, the country's largest private shipyard, which has laid off thousands and is lobbying local governments for a bailout. All the talk about dealing with overcapacity sounds nice, but if even Rongsheng is not subject to market discipline then it will be hard to be optimistic about the tolerance for the deep dislocations needed to restructure the economy.
THE GOVERNMENT'S NEXT MOVE
This column has argued several times that Beijing does have a plan and is serious about economic reform. Economists inside the Chinese government, and certainly Premier Li, understand very clearly what the challenges are.
In August 2012, Li Zuojun, deputy director of the Institute of Resources and Environmental Policy Research at the Development Research Center of the State Council, published an article detailing nine major challenges the Chinese economy faces. His article received a fair amount of notice.
During the interbank crisis in June, Li Zuojun became an Internet sensation, not for that 2012 article but for a talk he gave in 2011 that predicted an economic crisis in July or August 2013. In that talk, Mr. Li said that China was in the midst of a bubble that would pop by 2015 or 2016.
Mr. Li argued that the new leadership that would be in place by 2013 would have the choice of either taking on the bubble and letting it run, in which case they would be responsible, or popping it soon after they took power in 2013, in which case they could blame the previous administration.
In addition, the new leaders could reset the benchmarks to a lower base and, assuming they could manage through the social challenges of an economic dislocation, would be able to show strong growth through the remainder of their term.
The Development Research Center is an influential government policy research group, one that worked with the World Bank to write the “China 2030†report, a road map for ambitious economic reforms released last year. Premier Li is widely believed to have supported the center in its work with the World Bank.
Transparency is not a strength of the Chinese government, so while there are signs that bigger things are going on it is difficult to be certain. Regardless, the long, hot summer is just getting started and the economy has more weakness ahead.
