The accuracy of Chinese economic statistics is always a topic of debate, and the global financial crisis added a lot of fuel to the fire. According to official statistics, China looks to be one of the first to emerge from the downturn, at least as far as reporting growth acceleration. GDP data to be released later this week are likely to show acceleration from the 6.1% y/y pace in Q1 2009. Yet this recovery seems questionable when China’s exports and major trading partners continue to suffer.
Some indicators seem to suggest that China’s growth at the end of last year may have been even weaker than Beijing claimed. (In China, 6% growth represents a hard landing compared to the 10% average of the previous five years.) For example, the International Energy Agency (IEA) questioned how China’s 6.1% y/y growth rate in Q1 2009 could match up with its 3.5% y/y drop in oil demand in the same quarter. The IEA admits that “pinpointing China’s oil demand with accuracy is an exercise fraught with difficulties,” but other, more easily verified indicators also seemed out of alignment in Q4 2008 and Q1 2009.
As we did last week with our U.S. economic outlook, this week we present a preview of our outlook for the Chinese economy in 2009 and 2010. The following is excerpted from RGE’s global outlook, which will be released to RGE clients later this month.
The full version of the China outlook will include the following sections:
Stimulus Boosting Investment: Pressing on the Same Levers
Property Investment Stabilizing?
Consumption Holding Up, But Can it Grow?
Inflation and Monetary Policy: Leaning on the Banks
Fiscal Policy and Effectiveness of the Stimulus
Banks and Credit Market Vulnerabilities
The Chinese Yuan and Equity Markets
Chinese Reserve Accumulation and Diversification
The RGE Monitor Global Economic Outlook presents analysis quarterly on over 70 countries and several crucial global issues. Specifically, in this update, our analysts cover trade and protectionism, risks of rising fiscal deficits around the world, global imbalances and climate change, among other issues. The complete RGE Monitor Global Economic Outlook will be available to Tier 1 Advisory Clients at the end of this week in advance of next week’s posting on the site for RGE Premium subscribers.
Timothy Geithner, the U.S. Treasury Secretary, travels to the GCC (Saudi Arabia and the UAE) in a few days to commune with some of the more significant creditors of the U.S. and possibly urge these savings-rich countries to contribute to the IMF, as several emerging market economies have pledged. As a result it seems an apt time to re-estimate how much these governments and their neighbors in Qatar and Kuwait have accumulated.
While the Gulf’s holdings of U.S. assets pale in comparison to China’s, the GCC possesses the largest trove of US stocks among foreign governments. With most of its assets managed by the central bank, Saudi Arabia likely holds the most US treasury bonds. The other GCC countries, most of whom entrusted their oil windfall (and gas in Qatar’s case) to an array of investment funds, tend to have a more diversified portfolio. However, the U.S. dollar still dominates the Gulf’s foreign asset position.
With the rise in the price of oil in Q2, some analysts have again been talking again about the global role of sovereign funds. While some, such as the China Investment Corporation (CIC), for one, seem to have become more active investors again, the Gulf funds still seem to be homeward looking. The latest –and forthcoming – RGE Monitor Global Outlook suggests that growth in the GCC will be flat in real terms, with a slight contraction. The significant assets of the region have allowed GCC countries to steer their economies to a softer, if still, harsh landing. Much of the region’s output, investment and sentiment remain linked to oil despite various attempts to diversify its economy. Steffen Hertog has a nice piece on the lessons learned from the 80s by Arab oil producers.
The St Petersburg Economic Forum just wrapped up yesterday (June 6). Russian officials have traditionally used this forum to advocate for greater use of the ruble as a reserve currency, the importance of developing a financial center in Russia and in particular to point to vulnerabilities of relying on the U.S. dollar and U.S. financial regulation. They have also tended to pledge that Russia’s investment climate will become more predictable and that Russia is putting diversification away from oil as a key priority. This year was no exception.
Medvedev’s plan (which was downplayed by Finance Minster Kudrin) envisages a set of regional reserve currencies (perhaps the ruble in the CIS etc, the RMB in parts of Asia) perhaps accompanied by greater use of the IMF’s special drawing rights.
Less than 24 hours after Dubai’s finance chief was demoted, the UAE announced its decision to withdraw from the GCC Monetary Union, putting the broader union at risk. This decision comes two weeks after a major milestone; selection of the location of the GCC Central Bank. UAE officials did not conceal their reservations about the choice of Saudi Arabia to host the institution. UAE newspapers heavily criticized the Saudis in what may have developed into a political rift.
For starters, the GCC Secretariat is already located in Saudi Arabia and other institutions in other GCC countries, and with plans to diversify the government institutions, they believed that the GCC Central Bank should be located in the UAE, given its development as one of the region’s financial hub, possibly with a presiding Saudi National.
Brazilian President Lula is the latest world leader (after Wen Jiabao and Vladimir Putin) to call for moving away from the US dollar in trade and and for a new monetary and financial order. On the eve of his trip to China this week, Lula suggested in an interview with Caijing (and other news sources) that the two countries should conduct more of their trade in their own currencies rather than the US dollar.
“Between Brazil and China, we need to establish a trade that is paid for in our own currencies. We don’t need dollars. Why do two important countries like China and Brazil have to use the dollar as a reference, instead of our own currencies? We’ve already started doing this with Argentina. Our trade is taking place in our own currencies. Otherwise, we’ll be in an absurd situation, where the country that caused this crisis will be the country that gets the most dollars. It’s crazy that the dollar is the reference, and that you give a single country the power to print that currency. We need to give greater value to the Chinese and Brazilian currencies.”
On May 14th, the Central Bank of Kuwait, the Kuwait Investment Authority (KIA) and a number of private companies entered into discussions to establish a fund, or a “bad bank”, to purchase toxic assets from the country’s investment companies’ balance sheets. This could be the latest new tool in Kuwait’s tool box, and such plans come less than a week after the central bank proposed a third round of stress tests. While details have yet to be released – and there is still reportedly some concern about who and how it might be administered, this could be a step in the process of rescuing Kuwait’s financial sector, though only if it is done transparently.
Following the rescue of Gulf Bank and the default of Global Investment House of one of its bonds last fall, the government has been rolling out new measures in the face of weaker risk appetite in the GCC and globally. On the financial side, it has provided capital to banks, guaranteed deposits etc. It has continued monetary easing and plans to maintain spending though the details of allocation are uncertain. The political stalemate in the Kuwait has not helped these responses and uncertainty about the exposure of corporations and investment companies, as well as the fear of asset ,market losses have kept banks unwilling to lend. The default shed light on the vulnerabilities in other Kuwaiti institutions, underscored by a wave of banking downgrades in the GCC and in Kuwait’s overall banking system, towards the end of 2008 and start of 2009. Moreover, delays in reporting financial results led to trade of many financial and non-financial corporations in spring 2009. Although trading in most resumed after Q4 results were released, reports suggest that the same thing led authorities to stop trading today in 26 companies.
Chinese foreign exchange reserves data was released today – Reserves stood at $1.95 trillion at the end of March 2009, just under $8 billion more than at the end of 2008 – a much slower pace of growth than in 2007 or 2008.
Bloomberg notes “The currency reserves plunged by $32.6 billion in January, the biggest monthly decline since Bloomberg started compiling data in 1996. The holdings shrank by $1.4 billon in February and expanded $41.7 billion in March.”
To a large extent this slow growth was not a surprise. The $30bn nominal drop in fx reserves was leaked to the press a few weeks ago – and as usual, the leak was pretty accurate. Furthermore, it fairly consistent with other indicators that Chinese macro conditions were under severe stress at the beginning of the year.
In recent days and weeks, most of the GCC governments have announced plans (or hinted at) issuing sovereign bonds. Kuwait, Abu Dhabi, Dubai (of the UAE), Qatar and Bahrain have all suggested they would issue bonds in coming months, totalling several billion dollars.
In recent years, the issuance of sovereign debt by GCC governments has been quite limited to Bahrain and Oman in light of the enormous surpluses accrued in light of the once-soaring oil prices. In fact a few sovereigns, and sub-sovereigns like Abu Dhabi, did not even have credit ratings. Instead most of the limited bond issuance was by government-linked companies throughout the region. Yet, and as we have explained in a recent piece, with the reversal in hot money, in addition to the the losses and continued losses in the region’s equity markets, the cost of long-term borrowing sky-rocketed, highlighting the vulnerability of relying on external finance even as new revenues began to fall as investment returns and oil revenues fell sharply. Also, with external finance expected to grow at a slower pace in the face of the continued global liquidity crunch, GCC countries are left with no other option but to try to explore other sources of financing to tap the latent funds available in the region and from foreign investors looking for relatively safer credit risks.
The prognosis for Asia’s financial sector in 2009 is relatively better compared to other emerging economies and also compared to the region’s own experience in 1997-98. Even so, further GDP contractions and asset market corrections are likely as the external environment continues to deteriorate and domestic demand falters.