Download Scenario of 8% Growth in China Inducing Recovery in Japan Incorrect

Strategy and Economic Report
3 March 2009 (No. of pages: 6)
Scenario of 8% Growth in China
Inducing Recovery in Japan
Incorrect
Exports from Japan to China moving in line with China’s electric power
generation rather than its GDP growth
Japanese report: 2 Mar 09
Economic Research Dept
Mitsumaru Kumagai
Masahiko Hashimoto
Summary
ƒ Japan’s economy is contracting sharply, but there are growing expectations that China’s
economy will help induce recovery––in response to a slowdown, the Chinese government has
announced a series of large economic stimulus measures (4 trillion yuan in aggregate by endCY10; 13% of GDP), leading Japan’s markets to anticipate that Japan’s economy will begin to
recover should China’s economy attain 8% growth.
ƒ However, it is mistaken to believe that such economic growth in China will induce Japan’s
recovery. The key in this report is that exports from Japan to China have moved in line with
China’s electric power generation rather than its GDP growth. In China, electric power
generation has plunged while real GDP has grown steadily, widening the gap between them.
We believe electric power generation better represents the real situation with respect to
China’s economy. Thus, even should China attain 8% economic growth, Japan’s economy will
not necessarily begin to recover.
ƒ The possibility of China’s economic growth grinding to a halt is limited. Considering that (1)
China’s economy is not a pure market economy but a socialist market economy, (2)
inflationary pressure has greatly waned and a greater margin exists for lowering interest rates,
and (3) the ratio of government bonds outstanding to GDP is only around 20%, should China
forcefully implement stimulus measures the possibility of economic growth coming to a halt is
small. Dividing the economies of the world into four in terms of the US economy and resource
prices, for China with an economic structure that is highly dependent on the US and vulnerable
to high resource prices, lower commodity prices greatly easing inflationary pressure is the best
possible news.
ƒ In conclusion, while there appears to be only limited possibility of China’s economic growth
halting, we cannot place excessive expectations on the scenario that the expansion of China’s
economy will trigger a bottoming out of Japan’s economy.
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH
CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT.
Japanese Equity Research
Growing expectations
China’s economy will
induce Japan’s economic
recovery
Japan’s economy is contracting sharply, but there are growing expectations that
China’s economy will help induce recovery––in response to a slowdown the Chinese
government has announced a series of large economic stimulus measures (4 trillion
yuan in aggregate by end-CY10; 13% of GDP), leading Japan’s markets to anticipate
that Japan’s economy will begin to recover should China’s economy attain 8% growth.
This report analyzes the validity of the scenario of 8% economic growth in China
driving economic recovery in Japan.
Exports from Japan to
China moving in line with
China’s electric power
generation rather than its
GDP growth
However, it is mistaken to believe that such economic growth in China will induce
Japan’s recovery. The key in this report is, as shown in charts 1 and 2, that exports
from Japan to China have moved in line with China’s electric power generation
rather than its GDP growth. In China, electric power generation has plunged while
real GDP has grown steadily, widening the gap between them. We believe electric
power generation better represents the real situation with respect to China’s
economy. Thus, even should China attain 8% economic growth, Japan’s economy
will not necessarily begin to recover. To determine economic conditions in China
going forward, electric power generation warrants monitoring.
Chart 1
Chart 2
China's Electric Power Generation and Exports from Japan to China
(Y/y %)
40
35
China's GDP and Exports from Japan to China (Y/y %)
16
40
Electric power generation in China
China's GDP
30
30
14
30
20
12
20
10
10
10
0
8
0
-10
6
25
20
15
10
5
0
-5
Export volume from Japan to China (right)
-10
-15
04
05
06
Source: CEIC Data; MOF.
07
08
09
-20
4
-30
2
-10
Overestimation of GDP?
Export volume
from Japan
to China (right)
-20
-30
04
05
06
07
08
09
Source: CEIC Data; MOF.
Limited possibility of
China’s economic
growth halting
The possibility of China’s economic growth grinding to a halt is limited.
Considering that (1) China’s economy is not a pure market economy but a socialist
market economy, (2) inflationary pressure has greatly waned and a greater margin
exists for lowering interest rates, and (3) the ratio of government bonds outstanding
to GDP is only around 20%, should China forcefully implement stimulus measures
the possibility of economic growth coming to a halt is small. As China’s purchases
of iron ore rebound, the Baltic Exchange Dry Index is showing signs of bottoming
out (Chart 3).
Decline in commodity
prices easing inflationary
pressure the best possible
news for China
The decline in commodity prices greatly easing inflationary pressure is the best
possible news for China. Chart 4 divides the economies of the world into four
along the axes of the US economy and resource prices. The vertical axis depicts the
percentage share of exports to the US in respective countries’ GDP. It offers a
measure of the degree to which the slowing of the US economy affects domestic
economies through lower exports to the US. The horizontal axis portrays the ratio
of net exports of mineral resources (crude oil, iron ore, etc.) to GDP. This axis
provides a measure of the degree to which domestic economies are influenced by
surging resource prices. Economies positioned high in the chart are highly
dependent on exports to the US and are vulnerable to the slowing of the US
economy. Also, economies positioned on the left of the chart are highly dependent
Scenario of 8% Growth in China Inducing Recovery in Japan Incorrect
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on the net import of resources. Their terms of trade can readily worsen, and they
are vulnerable to surging resource prices.
Chart 3
Steel Price in China and Shipping Market (Y/y %)
90
280
75
240
Baltic Exchange Dry Index* (right)
200
60
160
45
120
30
80
40
15
0
0
-40
-15
-80
Steel price (round steel; wholesale)
-30
-120
02
03
04
05
06
07
08
Source: Datastream, CEIC Data; compiled by DIR.
* monthly avg; Feb 2009: as of 17 Feb.
Chart 4
Sorting of Countries in Terms of Sensitivity to US Economy and Resource Prices
Vulnerable to US economic slowdown
Japan's major trading partners are US
dependent and resource-consuming economies.
(Exports to US; % of GDP)
25
Resource-consuming
countries dependent
on the US
Malaysia
Canada
Mexico
Resource-producing
countries dependent
on the US
20
Vietnam
15
Singapore
Ireland
China
South Africa
Thailand
New Zealand
10
Switzerland
Philippines
Korea
Vulnerable
to higher
commodity prices
5
Hong
Kong
Germany
Sweden
Netherlands
Indonesia
Belgium
Brazil
0
-10
Resource-consuming
countries independent
of the US
-5
0
Resource-producing
countries independent
of the US
Australia
Japan India Italy
France UK
Spain
5
Middle
East
Russia
Chile
10
Relatively immune
to higher
commodity prices
15
20
(Net resource exports;
% of GDP)
Relatively immune to US economic slowdown
Source: UN, US Census Bureau; compiled by DIR.
Resources: Mineral fuels (oil, etc.,) and non-food materials (iron ore, etc.,).
To see the impact on respective countries in a simple way, exports to the US and net resource exports are shown as % of GDP.
Size of red circles indicates the value of exports from Japan.
Major countries outside the graph are Saudi Arabia (exports to US: 53% of GDP; net resource exports: 9% of GDP),
Kuwait (39%; 4%), and Venezuela (31%; 20%). Export shares to these countries are below 1% of Japan's exports,
which are shown by the smallest red dots.
Scenario of 8% Growth in China Inducing Recovery in Japan Incorrect
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China’s economic
structure highly
dependent on the US and
vulnerable to high
resource prices
It should be evident that a steep rise in commodity prices is disadvantageous for
nations positioned in the upper left quadrant of the chart, which includes China and
other East Asian nations. The size of the circles in the chart indicates the value of
exports from Japan, confirming again the close ties between the Japanese economy
and the nations in the upper left. The implication of Chart 4 can be summarized as
follows. For China with an economic structure that is highly dependent on the US
and vulnerable to high resource prices, lower commodity prices greatly easing
inflationary pressure is the best possible news. Should inflationary pressure subside,
the Chinese authorities will be able to fully pursue financial and monetary policies.
Excessive expectations
that expansion of
China’s economy will
trigger bottoming out of
Japan’s economy
In conclusion, it is mistaken to think that likely 8% economic growth in China will
drive Japan’s recovery. While the possibility should be limited of China’s
economic growth coming to a halt, we cannot place excessive expectations on the
scenario that the expansion of China’s economy will trigger a bottoming out of
Japan’s economy.
Abbreviations in sources (alphabetical order): MOF: Ministry of Finance; UN: United Nations.
Translation/accuracy check: T.K.
Style check: London Translation Team
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