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Seven Reasons that China’s Economy might be slowing down

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China has been called the “savior” of the world’s economy as its massive $586 billion  Government Stimulus and Easy Money policies sustained over 10% GDP growth in 2009 even as the world GDP was contracting for the first time in recent history.However China’s huge stimulus has created problems of inflation and asset bubbles which threaten to slow down the world’s “Growth Engine” . This combined with the Greek Contagion has raised the fears that a “double dip” world recession could be just around the corner.China’s leadership is also wary of a second global downturn. However a bubble in the real estate  has forced the hand of Chinese authorities which are trying to cool down the red hot “real estate” sector.The reasons that China’s economy which has averaged around 7-8% GDP growth in the last 30 years might be slowing down are listed here

  1. Real Estate is a Bubble - The Chinese real estate is in a bubble with real estate prices growing far in excess of Chinese income levels.Though the real estate is not driven by a debt fueled boom like the US and other developed countries , nonetheless avg real estate prices / average income levels would suggest that the real estate prices are poised to come down sharply.Chinese authorities are using both monetary and non-monetary tools to bring sanity to this market
  2. US  and European Export markets are slowing down – China’s growth has been a export driven growth like those of other Asian Tigers.However its main export markets of Europe and US are going to see sub-par growth in the next few years due to a debt driven excess.Europe’s Austerity measures and a low Euro is not an ideal situation for China’s export industries .
  3. Pressures on Yuan growing – China is facing an ever increasing chorus from countries around the world to appreciate the yuan which is artificially suppressed through currency controls.Some think tanks suggest that the yuan is 40% undervalued to its fair value against the dollar.With countries seeing their domestic markets shrink,everyone wants to export more and import less to repower their economies.An undervalued yuan is a trigger for trade wars.
  4. Foreign MNCs feeling discriminated against – China’s protectionist policies has led to an alienation amongst the foreign companies doing business in the country.Rio Tinto’s much publicized China corruption case and the Google abandonment of China has brought this issue into the limelight.Foreign countries are reevaluating whether China’s huge market is worth the discrimination they face vis-a-vis domestic companies
  5. Banks and Local Government have huge unaccounted liabilities - China’s corporate structure runs large based on patronage networks of government owned banks , state owned companies and provincial authorities.This frequently leads to misallocation in capital which shows up in the forms of NPAs.Local governments compete with each other for projects giving out huge subsidies and incentives which are funded mainly through local land sales.With real estate prices crashing and profits of export industries being pressurized , this is another bubble that may crack.
  6. Chinese Stock Market is down the most among major markets in 2010 – The Chinese stock market has been the worst performer among major economies with the interest rate increases and real estate bubbles making investors wary.Note this by itself is a poor indicator of economic health as stock markets are generally poor predictors of economy in the short run
  7. Chinese wages are going up – There has been a lot of social unrest and suicides in China as wages fail to keep in sync with the rising productivity.Recent suicides at Electronics Giant Foxconn and strikes at Honda are indicative of this trend .Low  wages which are China’s biggest competitive advantages may no longer remain one for much longer.

Asia Stocks Fall on China’s Manufacturing Report; Ringgit Drops – Boomberg

Chinese manufacturing expanded at slower pace in May, raising concern imports by the world’s fastest-growing major economy is easing. “There seems to be a worry that China’s strong economic expansion may be held back, and that may affect countries that depend heavily on China’s demand,” said Lim Chang Gue, a fund manager at Samsung Asset Management in Seoul, which manages $30 billion. “Also, if economic figures in troubled European countries turn out to be clearly deteriorating, that could add anxiety to the markets.”China’s Purchasing Managers’ Index dropped to 53.9 from 55.7 in April, seasonally adjusted, the Federation of Logistics and Purchasing said, less than the median 54.5 estimate in a Bloomberg News survey of 18 economists.

PG

Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in or call me on +913340606492.

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