Chinese Challenges in 2012 and What China Intends to do about it (Nothing Much)

China faces a major change in 2012 with the top leadership of the country going to new leaders and the old set will go away.This means new policies and directions amidst major challenges to the Chinse economy and society.

China faces multiple challenges

1) Slowdown in Europe and USA means that their exports are sputtering and manufacturing has already started contracting

2) Protests in cities and villages grows against rampant corruption and land grabbing by Communist officials.Lack of democracy means violent protests at times.

3) Debt is becoming a huge problem with local government vehicles facing trouble as they can no longer raise money from real estate sales which has fallen by 20-25%

4) Massive industrial overcapacity is being exported outside.This has made the other trading nations put duties and curbs.A big trade war with USA cannot be ruled out.Chinese solar and wind products faced countervailing duties and dumping charges.China has already imposed high duties on US car imports.

What China intends to do

a) China will balance “relatively quick” economic growth with inflation control in 2012 (don’t know what that means and how will they do it)

b) Country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

c) the 25-member Politburo affirmed an unchanged “proactive” fiscal stance for 2012 in December, a Nov. 30 cut in banks’ reserve requirements indicated a shift toward a bigger emphasis on supporting growth.

Here is what I wrote in 2010 on why Chinese economy might be slowing down

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.

China to Balance ‘Quick’ Growth With Inflation in 2012, Hu Says

China will balance “relatively quick” economic growth with inflation control in 2012, amid rising uncertainty about the world economic recovery, President Hu Jintao said in a speech yesterday.The government will speed up economic structural adjustment and give priority to improving people’s well-being, Hu said in the five-minute New Year’s Eve speech carried on state television and radio.China’s manufacturing contracted for a second month in December as Europe’s debt crisis cut export demand, fueling speculation that the central bank may cut lenders’ reserve requirements within days.Earlier yesterday, the head of China’s central bank, Zhou Xiaochuan, said the country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

Summary

From the above it seems that the Chinese government still does not know exactly what to do.Controlling inflation with high growth seems a bit difficult.The problems are too big and the economy will slow down substantially.