China And Japan: A Tale of Two Economies

Sydney, Aug 5, 2008 (ABN Newswire) - Significant changes seem to be happening in Australia's two key export markets, China and Japan.

The two countries are major buyers of our resources, especially coal, iron ore, oil and gas, plus some farm products.

Both are also major sources of imports: China for cheaper consumer orientated goods, Japan, for more sophisticated cars, trucks, consumer electronics and business equipment and capital goods of all types.

The changes are more important than the headline grabbing stuff about the Olympics.

There are strong suggestions China has decided to try and re-ignite its slowing growth machine after the Games, while the Japanese Government, which changed key economics ministers at the weekend as it faces growing political pressure, may be forced to face up to the extent of the country's economic slowdown.

Japan's economy has been growing at a rate of about 2% since 2002, a sustained, if modest, six years of growth that have helped put the property bubble years behind it.

But all that has come to an end in recent months as wages, industrial production and exports have all tanked, while inflation has spiked to a decade high of 1.9%.

There's now an increasing suggestion from Tokyo reports that the Government will have to face up to the unpleasant news that the country's economy has tipped over into recession.

At worst it will be a one quarter wonder in the June three months, but analysts reckon the slowdown will continue into this quarter as well.

The key bit of news was confirmation that industrial production had contracted for a second straight quarter. In export heavy Japan, industrial production is a more important key (along with exports, which fell 1.7% in June in a major surprise)

Japanese companies also cut estimates of their production in the third quarter as they adjusted to slowing exports. That fall in June was the first for well over four years.

Consumer sentiment is falling as wages drop and inflation pushes towards 2%, driven by higher wheat, rice and other food prices, and the surge in the cost of energy, especially oil and petrol.

Unemployment last week hit a two-year high in June of 4.1%.

On Thursday, the mighty Toyota, the country's major industrial group, will reveal its latest earnings and sales figures. And there will be forecasts for the rest of the calendar and Japanese fiscal year.

The outlook and the profit and sales figures won't be pretty after the collapse of the US car industry from May to June. It's Toyota's major market and although its market share rose last month, overall sales dropped 12% in a big surprise.

Driving much of the slowdown is the drop in demand from the US and Europe, especially for cars, consumer good and industrial and capital products. 

Sales to emerging markets, especially China are still rising, but the growth is slowing because China has slowed.

Most economists expect Japan to grow at about 1.2% this year, not the stuff of the 1.5% slump a decade ago.

But like the US, estimates in Japan have a nasty habit of falling short of expectations as reality hits.

That's why the post Games moves by the Chinese leadership are as important to Japan, as they are to resource-rich Australia.

Our economic well being next year and into 2010 depends on it.

Buried in Friday's peacemaking press conference with Western media in Beijing with Chinese President Hu Jintao, was some important news about the path of the slowing economy.

There was a confession that tough times lay ahead, hence the emerging suggestion that growth is back in favour, after the games, when factories can be restarted and the growth machine cranked up.

Last week saw comments at the press conference that seemed to hint at a different approach after the games and the success that China expects.

Very quietly, bank lending quotas were increased 5% last week, while in a more significant move, textile manufacturers won additional tax breaks.

They have been hit by a loss of export rebates as China has tried to cool trade tensions with Europe and the US and stimulate the growth of more complex and value-added exports.

The extra bank loans will be be directed at small and medium-sized businesses and agriculture, which have been doing it tough amid rising inflation and price controls ahead of the games.

The textile sector still employees millions (although many jobs have been lost) but the rise in the currency and higher input costs (such as labour and the cost of energy) have sliced margins to ultra low levels.

Exports now seem to be getting some help from a sharp easing in the rate of appreciation of the renminbi: it rose just 0.3% against the US dollar last month, compared to the 7% rise in the first half of the year which helped cut export growth dramatically.

All these moves are pointing towards a loosening of the tough monetary and fiscal controls.

Don't be surprised if the price controls on energy and a host of charges and commodities come off gradually after the games so as to gently allow inflation to perk up from the 7.1% annual rate in June.

Economic growth has slowed to around 10.1% from the 11.9% rate for all of 2007 (and above 12% for at least the middle six months of last year).

In that press conference on Friday, according to the Financial Times, President Hu said fast growth remained a priority, a comment interpreted by the markets as a sign of government support.

Last Thursday, increases had already been announced in tax rebates to exporters and now some commentators reckon the asset ratio, currently at 17.5%, will be loosened a touch to allow more loans to be made by state controlled banks in coming months.

China's export growth has slowed to around 7% annual from 30%-plus a year ago as the currency has risen and the government has cut lending.

Some commentators reckon that the cuts and closures for the games will see GDP growth slow to less than 10% this year, and possibly lower in the early months of 2009. The National Australia Bank last week forecast China's growth at around 8.6% next year.

China though does have more room to move than the debt-ridden, sluggish US economy.

China's sovereign debt has been upgraded by Standard & Poor's to reflect the country's improving government finances, huge foreign currency reserves and potential for "exceptional" economic growth.

The ratings improvement came last week, a week before the start of the Beijing Olympics.
China's $US 1,810 billion of foreign reserves – the world's biggest underpins the ratings upgrade to a long-term sovereign credit rating of A to A+ and the short-term from A-1 to A-1+.

The outlook is stable; meaning that S&P thinks the risks to government finances is moderate over the next three to five years.

That sort of blessing gives the Government a lot of room to move to push the growth button again, after the games.

Australia and quite a few other countries are watching very closely.

Our growth in 2009 and beyond depends heavily on that, and the success of the RBA's campaign to slow inflation.


 

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