China faces economic slowdown, not Minsky Moment

Over the past month, China has been producing a series of tepid macro economic data. Financial headlines have barely been short of disappointing. Signs are pointing to the fact that the world's second largest economy is slowing down.

The latest evidence could be found in the HSBC manufacturing purchasing managers' index (PMI), a key measure of factory activity in China. The official PMI reading repeats the same message.

The two PMIs, both released on Tuesday, are among the earliest available indicators to gauge the country's manufacturing sector operating conditions in the first quarter.

The official PMI for March, compiled by the National Bureau of Statistics and the China Federation of Logistics and Purchasing, edged up 0.1 percentage points from February to 50.3. The reading, the first rise since November, is just above 50 -- the expansion/contraction watershed.

The HSBC/Markit PMI, which sampled small- and medium-sized enterprises, dipped to an eight-month low of 48 in March, from a final reading of 48.5 in February. It also signals the sharpest fall of output since November 2011.

In fact, many economic figures released so far this year -- including industrial production, fixed asset investment and housing sales for the first two months -- were all weaker than forecasts.

For instance, industrial production growth in the Jan.-Feb. period dropped by 1.4 percentage points to 8.6 percent year on year. This is the lowest reading since April 2009.

Apart from lukewarm macro data, media reports over possible corporate defaults by two companies in East China -- Shanghai Chaori and Zhejiang Xingrun -- added to concerns over credit defaults and shadow banking.

Indeed, it is fair to say there is an economic slowdown. But there will be no "Minsky Moment" for China as some Western economists claim.

The phenomenon is named after late U.S. economist Hyman P. Minsky, who claimed that periods of rising asset valuation lead to speculation with borrowed debt, only to end in crisis.

This term sounds familiar. Like "Lehman Moment" and "Bear Stearns Moment", it is another American financial crisis lexicon which a few Western economists have borrowed to describe "difficulties and risks" faced by the Chinese economy, as Chinese Premier Li Keqiang put it.

While it might be too early to say that China could achieve its annual growth target of 7.5 percent, and there might be additional defaults of individual financial products, fears of a Minsky Moment are overstated.

China is not liable to any systemic financial risks given the Chinese government's strong fiscal capacity, the banking system's ample domestic funding, and state ownership interest in banks.

For China's economy, improving external demand and solid domestic consumption are sources of support for growth. Deepening reforms are also expected to inject dividends into the economy.

China's real exports in 2014 are set to recover on the back of better growth in the United States and Europe, despite a relatively strong Renminbi and weak emerging markets. Fast increase in the sub-index for new export orders in March's HSBC and official PMIs, both of which stayed above 50, testified to this.

Exports, along with consumption and investment, have been one of the three main drivers for China's growth. External demand supports about 12 percent of the country's GDP and absorbs some 35 percent of industrial output.

Economists believe that net exports are expected to contribute positively to China's GDP growth in 2014, for the first time in four years.

Consumption is predicted to see firmer growth this year since base effects become more favorable a year after public consumption controls. Moreover, steady wage growth and the expansion of the social security network are set to support private consumption.

The government's reform measures, as promised, could be growth supportive if they help improve efficiency. Over the past 30 years, economic reforms have been able to boost China's GDP and its potential significantly.

It is also worth mentioning that China's economy sometimes marches to the beat of its own drummer. Economic activity in the beginning of the year tends to be slow and macro data are often distorted by the Chinese New Year holiday. So, economists should be cautious when using them to predict the rest of the year.