Don't panic about China's slowdown, Goldman says
China's growth is poised to decelerate this quarter and the road ahead will be bumpy. But don't panic, says the most accurate forecaster on the nation's economy.
Growth will slow to 6.7 percent in the first three months of this year as financial services contributes less to the expansion than a year ago and because policy measures to support growth have tapered off from the last quarter of 2015, says Song Yu, Beijing-based chief China economist at Goldman Sachs Gao Hua Securities Co. and the best overall forecaster of China's economy according to Bloomberg Rankings for the past two years.
Even though full-year growth will drop to 6.4 percent in 2016 as wages, employment and consumption "take a hit," Song says he's not negative about China's economic prospects and dismisses dire predictions of a coming collapse. "Some people are making extreme arguments to say the whole machine is not working," said Song. "That's not what we see. Overall, the plane is moving in the direction it should be and it's broadly under control."
Policy makers have stepped up support for the economy, with the central bank Thursday guiding interest rates lower by offering to reduce the medium-term borrowing cost it charges lenders, according to a person with direct knowledge of the matter. The nation's chief planning agency has also made more money available for local infrastructure projects. Data released Thursday illustrated the room for policy easing, as deflation at the nation's factories extended for a record 47th straight month in January. Consumer price inflation picked up, led by food costs ahead of the week-long Lunar New Year holiday.
Figures published Monday underscored the challenges the world's largest trading nation is facing, as imports plunged 18.8 percent in January from a year earlier in U.S. dollar terms and exports dropped 11.2 percent.
The downward trajectory of growth is set to continue in the next two years, but there's no reason to panic because policy makers have both ample scope to support growth and can also unleash new growth drivers, he said.
When growth slows, "policy makers will come up with something," he said. "Easing has been enough to generate mini ups along a downward trend," he said. "And they could have done more. But they chose not to do more and that's important. They reserved ammo. They want to leave some ammo to protect themselves from extreme tail risk." Song likens the economy to a person who's in constraints, with restrictions such as bank reserve ratio requirements that are among the world's highest.
"He has ropes and chains all over him and he still walks at one mile per hour," he said. "That's not the same as a guy who is on drugs and he still can only walk at 1 mile per hour. If China hits some bumps, it just unties some more ropes." It did just that this month, allowing banks to cut the minimum required mortgage down payment to 20 percent for first-home purchases, the lowest level ever, from 25 percent. Meantime, China's cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending.