From the South China Morning Post, April 6:
Andrew Tilton on China’s growth prospects, economic trajectory in wake of Iran war
Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, speaks to the South China Morning Post about the long-term future of China’s economy after the “two sessions” in Beijing and ahead of an expected Xi-Trump summit – all during an oil crisis sparked by the US-Israel war against Iran.
For other interviews in the Open Questions series, click .
What impact will the oil shock arising from the Iran war have on the growth of Asian economies this year?
Asia is greatly affected by the war as the vast majority of oil and gas exported from the Persian Gulf in normal times goes to Asia. We’ve raised our inflation forecasts more than a percentage point on average since the start of the conflict and cut growth forecasts throughout Asia.
We think Japan, South Korea and China are relatively well insulated – they have significant strategic oil reserves and can afford to subsidise retail fuel prices. In these places we’ve made only small adjustments to our growth forecasts. This means the burden of adjustment to lower energy supply from the Middle East will fall more on other countries.
Several economies in South and Southeast Asia with lower incomes per capita – including but not limited to India, Thailand, the Philippines and Vietnam – rely significantly on foreign energy and are already taking measures to reduce demand or give some end users priority over others. A few have already had to narrow the focus of subsidy programmes to make them fiscally sustainable. In some cases central banks may have to raise interest rates to keep currencies from depreciating. Otherwise, the cost of imported goods could rise more generally. These actions will slow growth.
Will the impact of the Iran war impede China’s efforts to achieve its annual economic growth target? In that sense, do you think China needs more stimulus?
It’s too early to tell the full impact. China certainly had very robust trade leading up to the conflict, judging from the data recently released for January and February. President Xi Jinping has been focused for years on “self-reliance” – reducing China’s reliance on foreign suppliers and reducing its sensitivity to disturbances outside China – so this will be a test of sorts. Although it is a large oil importer, China gets most of its energy from domestic sources, especially coal. Part of its energy imports come from Russia via pipeline. It also has built up a strategic oil reserve and can leverage state-owned enterprises and the government budget to cushion the impact of higher energy prices on consumers.
Oil and natural gas prices are up very sharply, so there will still be some modest upwards pressure on inflation in China in the coming months. This makes rate cuts by the People’s Bank of China less likely than they seemed before the war.
Policymakers might also decide to increase government spending a little further if they see an impact on growth. Higher prices for imported energy will also reduce China’s trade surplus, other things being equal, though it is still likely to be very large.
What is your China gross domestic product growth forecast for 2026, and supported by what factors? Please share your view on the most important economic takeaways from last month’s – the annual meetings of the country’s legislature and top political advisory body.
We expect China to report 4.7 per cent GDP growth this year, with strong export performance the key driver – a similar pattern to last year. The housing sector is getting closer to a bottom, but is still a drag on the economy both in terms of investment and via its effects on consumer wealth, confidence and spending.
As expected, policymakers slightly lowered the official growth target this year, from around 5 per cent last year to a range of 4.5 to 5 per cent this year. Other targets were also broadly as expected, though Premier Li Qiang emphasised policy efforts to make sure the economy reflates, with both producer and consumer prices rising gradually.
Although real GDP growth may slow a little, we expect nominal growth – including inflation – to be higher this year than last.
The government’s budget suggests an intent to avoid excessive stimulus. Commentary from the various press conferences surrounding the two sessions implies a continued focus on technological progress and security issues, albeit also with gradually rising efforts to support consumption.
Goldman Sachs mentioned at a January news conference that the Chinese property sector may improve only from 2027 onwards. Why this timeline and how much improvement do you expect?
China’s in its fifth year of the housing downturn.
Other countries offer useful lessons for China in terms of how a large housing downturn typically plays out. Of course, China has its own special features. But the similarities are more important than the differences. In major housing busts, we typically see growth slow, inflation fall, monetary policy ease, the currency weaken and the trade balance improve. All of these things have happened in China too....
....MUCH MORE
It was Goldman that pointed out just how crazy China's property market had gotten with this factoid:
One story that has dropped from the headlines is China's property market, in part because the government has ordered the banks to open the nozzle on the liquidity fire hose. I think the official numbers are up to around $200 billion. But that's not even the amount of China Evergrande Group's debt ($300 billion), much less the rest of the sector, which itself is just a fraction of the total asset class which Goldman last year estimated to be the largest in the world at $62 trillion (but deflating fast)
What if the required rescue is 10 times the amount officially reported as being injected?
China would run into the same dilemma the U.S. faced when injecting $5 - 6 trillion into the American economy: If the powers-that-be allowed the economy to remain open as the liquidity poured in the resulting inflation would have been 40 -50% and would have hit the population within weeks. In China's case the rioting would have made the current protests look look like a convivial, collegial discussion group.
The lockdowns allowed the U.S. to bleed the inflation into the economy at a reduced rate, CPI is up 14% since January 2021, effectively deflating the Federal debt by a like amount or $4.2 trillion, equal to around 2/3 of the 2020 -2021 spending and liquidity injections.
The Chinese "zero covid" lockdowns make no sense from a public health standpoint and as one of my favorite China experts says, "Chinese are very smart people, there must be something else going on that you roundeyes don't see. And then he laughs when I tell him he is a racist....
That shaped our thinking for the next three years. Not as nuts as Japanese real estate in 1988 - 1989 but still crazy.
Japan in the 1980s: when Tokyo’s Imperial Palace was worth more than California and golf club membership could cost US$3 million – 5 crazy facts about the bubble economy
note: here are the comparables that were used to get the "more than California" bit, via Northwestern University:
...Cleary, the Imperial Palace was never on the market so we have to look at prices from “comparable” property values. Two values commonly cited are in the Ginza district, which borders on the Chiyoda district that includes the Imperial Palace itself. The first was for a 3 square meter corner sold for $600,000 dollars. The second one is $1.5 million per square meter ($139,000 per square foot) for office space.
The Palace itself, including gardens, is 3.41 square km. Using the three square meter corner as the base, the estimate for the palace is $852,500,000,000, a gigantic price tag for a single property. Even more astonishing, if we take the Ginza office space a reference point, the price balloons to over $5.1 trillion. For comparison, Japan’s GDP in 1989 was about 5.3 trillion dollars.
There are no available data about California’s total real estate value during that period. However, a back of-the-envelope calculation, using current values and factoring inflation rate, puts the total value of California’s real estate in 2015 at $2.45 trillion. The US inflation rate from 1989 to 2015 is about 1.91%. This comes to a range in value for all of California real estate to be from $1.6 trillion to an upper bound of $9.77 trillion....