The Consequences of a Slowing Chinese Economy
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The Consequences of a Slowing Chinese Economy

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It’s the 1 trillion yuan question: has China’s economic bubble finally burst?

It’s an unnerving issue for the global economy, particularly at a time when the presumed leader in waiting, Xi Jinping, has apparently gone “missing in action” just a month ahead of the once-in-a-decade leadership transition at the 18th Party Congress.

After clocking up an average 10 percent annual growth rate for 30 years, this year’s forecast for the Chinese economy is 7.5 percent, its lowest expansion since 1990. In August, industrial output growth dropped to its lowest level since May 2009, imports dipped 2.6 percent and steel output is expected to contract this year for the first time in three decades.

The recent 1 trillion yuan ($160 billion) infrastructure package announced by China’s top economic planning agency gave financial markets a brief bounce, but it was only a quarter of the amount spent in response to the global financial crisis. Among the 60 projects announced by the National Development and Reform Commission were urban rail, highway and water projects, yet little detail was released concerning their financing and the spending is expected to be spread out over a number of years.

An economy described previously by Chinese President Hu Jintao as having a “lack of balance, co-ordination and sustainability” is still overly reliant on fixed asset investment, which accounts for half of GDP, as well as exports..

Writing in The Diplomat, Professor Minxin Pei has warned of the “mother of all debt bombs” threatening the health of the Chinese economy. In his September 10, 2012 article, he cites figures which show that local government debt may account for up to 50 percent of GDP (Beijing estimates a quarter), with potentially another 14 trillion yuan owed by risky local government financing vehicles.

Chinese banks continue to report low levels of non-performing loans, but Pei estimates up to 1 trillion yuan in potential losses from wealth management products, on top of bad debts hidden in the form of inter-bank loans, which represent nearly half the total amount outstanding.

Beijing’s enforced real estate contraction has hit developers as well as ordinary home buyers, with property prices slow to recover. Manufacturers are also struggling with excess capacity, while foreign luxury goods makers such as Burberry have reported a significant slump in sales.

The consequences of China’s slowdown are visible in its neighbors Japan and South Korea, which have seen their exports fall from reduced purchases of intermediate goods by Chinese factories.

While Chinese exports rose at a 2.7 percent annual rate in August, up from just 1 percent the previous month, it is difficult to see a full-scale recovery until U.S. and European consumers start opening their wallets.

In resource-rich Australia, the end of China’s boom means lower prices for coal and iron ore that had previously generated a windfall for both mining companies and the federal treasury. The iron ore price peaked in 2011 at nearly $200 a ton but it recently plunged below $90, forcing miners to slash costs and threatening the Australian government’s projected budget surplus.

For foreign exchange markets, any move by China to weaken its exchange rate may trigger retaliation from the United States, with the U.S. President wanting to be seen as being “tough on China” going into the November election.

Significantly, the absolute size of China’s working age population is expected to peak in 2015, bringing an end to its demographic dividend and threatening to make the Middle Kingdom grow old before it becomes rich.

Yet China still has the world’s largest foreign exchange reserves and a solid official fiscal position, along with a low official debt to GDP ratio at 17 percent. Its urban population is expected to grow by about 300 million over the next 25 years, providing a sustainable boost to domestic demand.

At the end of the 1980s, Japan was forecast to overtake the U.S. and become the world’s top economy. Its unparalleled rise could not be halted, according to the experts at the time.

Is history repeating itself, or will China’s new leadership prove capable of defying the doomsayers?

Comments
3
Jaques666
September 19, 2012 at 06:36

Not sure where you are getting your demographic info, but the World Bank has working age population peaking in the next few years. The one child policy is going to throw this into a pretty abrupt downturn, even as pensioners continue to live longer (not a negative thing at all!).
 
China may have trillions (of RMB) to release, but the trouble is, that is what they did last time, and kicking the can down the road again is going to make the problems later much much harder to deal with. The reason that there has still been only a limited action this time is because the government recognize this fact, they are worried about inflation, property, but more so about exacerbating the imbalances. Wen and Hu have mentioned this on numerous occasions over the last 2 years.  The slowdown is about debt and the huge expansion in credit that has gone on over the last 5 years. (nb Total social financing has been running above 12 trillion RMB / year expansion for 3 or 4 years. Slowing down is THE ONLY way China can avoid a massive domestic debt crisis in the future.

strider
September 15, 2012 at 23:20

Yuan has been depreciating at a slow but steady speed since early this year, as a consequence of negative expectation of Chinese Economy, rather than a deliberate distortion. Rataliation maybe triggered from any protectionist action in trade between the U.S and China, but not likely a currency war at this stage.

Drive by
September 13, 2012 at 06:40

"Significantly, the absolute size of China’s working age population is expected to peak in 2015, bringing an end to its demographic dividend and threatening to make the Middle Kingdom grow old before it becomes rich."
Labor surplus is always the biggest problem, more so in the future because of accelerating application of automation and robotic technologies. The author's viewpoint would make more sense in the 19th and early 20th centries. The Chinese dependent-to-worker ratio will not peak until 2040s. By then China will have been fully industrilized, like today's industrial nations, where laber surplus and unemployment is one of main problems. Getting old before getting rich is not a real problem at all for China at this point.
Didn't Wen mention China still have trillions to release immediately in case it is needed just a couple of days ago? Anyway, the slowdown in China will be a temporary problem only.

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