Economies: China, India Japan Face Tougher 2012 Outlook

Some of our most vital export markets are facing a worsening in growth prospects for 2012.

China and India have warned their economies face a tough year.

China is our biggest export market and India is number four.

And we have also seen a bigger than expected souring in business confidence in our second biggest market, Japan.

Concern about the slowdown in China, especially in property and the eurozone debt crisis, has seen the Shanghai stockmarket slump 30% from this year's peak on April 18.

It has hit a series of 33 month lows in the past week and closed lower again yesterday after the release of more weak data.

The so-called "flash'' estimate from HSBC yesterday for its survey of Chinese manufacturing showed another month of contraction.

The reading was 49, above the 47.7 final reading for November, which would be good news if sustained in the final report at the end of this month.

And official figures yesterday showed foreign direct investment in China fell last month from November of last year, the first such fall since July 2009.

China's Ministry of Commerce said investment fell 9.8% to $US8.76 billion, after expanding 8.8% in October.

It could be a one-off, but coming amid worries about growth and the economy, it was seen by Chinese commentators as being a bit more symbolic than it really was.

But the news worried investors in Shanghai where it extended its recent losing run for another nasty fall of 2.1%, while Hong Kong was off 1.8%.

And India warned midweek that emerging market economies are beginning to "falter" and China's top economic policymakers described the global outlook as "extremely grim and complicated".

Both countries are experiencing falling economic growth, production (and at long last falling prices), weakening property prices, and are being buffeted by the impact of the euro crisis which is impacting exports.

On top of this, the other major emerging economy, Brazil, saw economic growth come to a halt in the September quarter, despite rate cuts.

China's Communist party ended its most important economic meeting of the year with an agreement to focus on maintaining fast economic growth next year, amid what it saw as a worsening outlook.

The annual three-day Central Economic Work Conference for top Communist officials sets policy for the coming year and this meeting clearly signalled that the leaders of the world's second-largest economy (and Australia's most important export market) are concerned about a slowdown in growth.

It is a message that has been emerging for the past month in speeches, statements and think pieces on official websites and news outlets in China.

The statement issued after this week's meeting ended on Wednesday saw a leading economist say that "growth has replaced inflation as Beijing's top policy concern".

According to Qu Hongbin, co-head of Asian economics research at HSBC, "The economy is likely to slow further, calling for more aggressive easing measures".

We have already seen one small easing with the drop in the Reserve Ratio for banks at the end of November and next will come a rate cut, according to a growing number of forecasts.

That prospect was underlined by this part of the statement issued after Wednesday's meeting and posted on Xinhua.

"It will preset or fine-tune monetary policy according to changes in economic development, employ multiple monetary policy tools and maintain a reasonable increase in money and credit supply," the statement said in outlining the key part of the country's economic policy.

Note the use of the words "fine tune monetary policy according to changes in economic development".

That means rate cuts and further reductions relaxation of the controls on bank lending if growth slows too sharply or production drops even further, which are both real prospects for the first half of next year.

China's November economic data showed acceleration in the slowdown, driven primarily by slowing housing sales and construction activity and sliding exports, particularly to Europe.

The fall in crude steel production in November to just over 49 million tonnes (we highlighted earlier this week) is a very visible indicator of the slowdown.

Steel production is running at a 10 month low and will struggle to return to the near 60 million tonnes a year level it was hitting in the first five months of 2011.

This week's conference agreed to set the main theme of next year's economic and social development as "making progress while maintaining stability", the statement said.

The plans mapped out at the conference will chart the course for China of next year's economic work. 2012 is also vital because of the change of leadership expected in the last quarter of the year

"Stability means to maintain basically steady macro-economic policy, relatively fast economic growth, stable consumer prices and social stability," the statement said.

"To make progress, we must seize this strategically important development period to make new advances and breakthroughs in transforming China's economic development model, deepen reform and improve people's lives," it said.

Wednesday's official statement indicates Chinese policy makers' intention to shore up growth while avoiding reawakening inflation which now seems to be under control, but not without a huge cost.

"China must stabilize economic growth to prevent a sharp plunge, which might dampen employment and cause social problems," Zhu Baoliang, deputy director of the Economic Forecast Department of the State Information Center, a government think tank was quoted on the official Xinhua website.

China's economic growth has been slowing all year, thanks to the tighter monetary policy, designed to control inflation and the overheating housing sector.

GDP growth slowed to an annual 9.1% in the September quarter from the 10.4% rate in 2010.

But offsetting this has been the fall in inflation at all levels in the Chinese economy.

The consumer price index fell to 4.2% in November from this year's peak of 6.5%, and producer price growth eased sharply to 2.7% from more than 5% in October, a significant fall.

So Wednesday's meeting decided that China "will maintain its stance of prudent monetary policy and proactive fiscal policy in 2012 according to the report on Xinhua and other websites.

"At the same time, the country will keep the Yuan's exchange rate basically stable while deepening interest rate and exchange rate formation mechanism reforms.

"It will preset or fine-tune monetary policy according to changes in economic development, employ multiple monetary policy tools and maintain a reasonable increase in money and credit supply.

"Meanwhile, the country will implement fiscal policy, such as further improving tax cut policies on selective sectors and enhancing input on sectors involving improving people's welfare.

"Measures aimed to regulate the property market will also be maintained next year to ensure housing prices return to a "reasonable level," said the statement, adding that more ordinary commercial residential housing will be built to increase effective supply.

"With the world economy slowing and international financial markets in chaos, several prominent risks have arisen. The world's economic recovery is expected to remain unstable and uncertain," the statement said.

The statement noted that China's economic development still contains "unbalanced, uncoordinated and unsustainable" strains, and faces pressure from both slowing economic growth and inflation.

"We should strengthen our awareness of risks and develop a full understanding of the challenges and opportunities brought by the global financial crisis to enhance our comprehensive strength and global competence through more strategic planning," it said.

Growth of exports, one of the major engines used to power China's expansion, also slowed to 13.8% in November from nearly 38% in January.

The statement said the country will keep moderate growth of fixed asset investment, optimize investment structure and ensure capital supply for major water conservancies, railways and equipment manufacturing projects.

And in India, the country's finance minister, Pranab Mukherjee, warned that the country had to turn its attention urgently to "reviving growth as quickly as possible" after alarming signs that financial markets were under renewed stresses.

His warning came two days ahead of a monetary policy meeting of the country's central bank that some analysts think might cut rates.

The Reserve Bank of India has boosted rates 13 times in the past two years to try and control inflation, which has dipped to 9.1% from 9.7% in the past month (both annual rates).

The Indian economy has been hit by a nasty combo of slowing growth and an alarming slide in the value of the Rupee.

Growth fell under an annual 7% in the second quarter, for the first time in two years, while industrial production in October tumbled by 5.1%, the biggest fall for two years.

That is being complicated by a political scandal over corruption, poor policy making from the central government and still high inflation, although like China, it seems to have peaked.

Indian GDP rose an annual 6.9% in the September quarter of 2011-12 from 8.4% in the same quarter of 2010.

And the government last week slashed India's GDP growth forecast for the current fiscal to 7.5% from the earlier estimate of around 9%, a substantial reduction.

Mr Mukherjee said as the sovereign debt crisis in Europe has hurt India which also has high debt and deficits.

He said India's difficulties with public debt and the deficit were "nowhere near" those of Europe's, but the political instability is adding to market concerns.

The slowdown in external demand has seen export growth slow and the current account deficit has risen to about 3% of the size of the economy (as measured by GDP).

Some of this anxiety has been driven by the dramatic fall in the value of India's currency.

In the past couple of weeks the Rupee has fallen to record lows of Rupees 53 to the dollar and is down around 17% for the year so far.

In Japan, the expected downturn in business sentiment emerged in the last Tankan survey from the Bank of Japan.

The December Tankan's sentiment index for big manufacturers dipped to minus-4 in December from plus-2 three months ago, indicating pessimists outnumber optimists.

That was much worse than the median forecast from economists of minus 2.

The reading marks the main index's first dip into negative territory since the June quarter survey, when the impact of the March 11 earthquake and tsunami was still causing supply chain problems across the country and internationally.

(The index is calculated by subtracting the percentage of firms saying business conditions are bad from those saying they are good.)

The Tankan survey reflects broad growth trends in the economy and serves as one of the central bank's key policy gauges, and it mirrors both the slowing pace of export growth and weaker than expected industrial production in the past three months.

And there's no sign that the dip is going to be reversed early in 2012, with big manufacturers expecting business conditions to deteriorate three months ahead with the outlook index for March next year at minus-5.

It's more evidence that the rebound from the March 11 disasters is losing impetus.

Big companies cut their capital expenditure plans for the year to next March to 1.4%, more than half the 3% rise forecast in the Tankan for the September quarter.

But it wasn't all bad with sentiment among large non-manufacturers improved to plus 4 in December from a reading of plus 1 in September.

Sentiment at medium-sized manufacturers remained steady but still pessimistic, at a -3 reading, unchanged from the previous survey.

And small manufacturers improved to a -8 result from -11 in the last survey.

The Bank of Japan meets next Tuesday to again look at monetary policy.

It won't do much, but as we head into 2012, the Japanese economy, like so many others around the world, is looking a bit patchy and running roughly.