By Maurits Elen
China is about to face a challenging upcoming year amid lingering fears concerning a global financial meltdown. Declining property prices and a severe trade situation are raising serious concerns regarding the economic stability of the backbone of the world economy.
According to Yu Bin, director general for the ruling State Council’s research center, China is facing the end of the period of high economic growth.
“China had been growing at high speed for three decades, but China’s fundamentals are changing, including demography and the demand and supply of labor. What we need is moderate and reasonable economic growth.”
As the demand for exports from the US and Europe will fall significantly, China is likely to face a severe trade situation in the first two quarters of 2012, with the outlook for rest of the year still obscure.
One of the most pessimistic predictions regarding China’s economic outlook comes from the investment bank Nomura International, which is based in Hong Kong. China’s economic growth is predicted to decline to 7.9 percent in 2012.
The last time that China had an economic growth rate below 8 percent was reportedly in 1998 when the financial crisis hit Asia-Pacific, but the 8 percent mark is considered the minimum growth rate needed to create enough jobs to keep up with a growing urban population.
While there is a divided ideology in Western countries over whether or not to cut spending during a recession, China took a blow for the world economy by going on a spending frenzy after the collapse of Lehman Brothers in 2008.
But now China is on the verge of a possible housing bubble, with symptoms looking very similar to the ones we have witnessed in the US. Banks have loaned out billions on property investments, but property prices have fallen 20 per cent this year, fostering fears that China’s credit bubble has burst and the world’s second-largest economy might be spinning out of control.
Albert Edwards from Societe Generale:
“Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)… a ‘bloody ridiculous investment concept’ in my view.
The BRICs are falling like bricks and the crises are home-blown, caused by their own boom-bust credit cycles. Industrial production is already falling in India, and Brazil will soon follow.”
As Europe faces an enormous sovereign debt crisis, local governments in China are also in desperate need of credit. Bad investments have been piling up huge debt, forcing Chinese regulators earlier this year to shift 2-3 trillion yuan in local debt. The action undertaken by credit-rich Beijing is seen by many analysts as a major risk to the economy.
In June Chinese billionaire Jin Libin set himself on fire to escape his creditors, one example of a possible credit bubble in the underground circuit. With 1.23 billion yuan in debt, Jin owed his creditor eight times more than he owed the banks.
Beyond declining property prices and sales, stocks from the Shanghai Index have fallen 30% since last May. The Hang Seng China Enterprises index, which tracks the equity market performance of major mainland companies listed in Hong Kong, was the worst performing equity market in Asia after declining 26% this year.
Foreign investment into China is fading for the first time in more than two years, as the business circumstances are thriving far less than before.
As Europe faces recession due to its sovereign debts crisis, and the US suffers poor economic growth and a high unemployment rate, both will have their eyes on China’s upcoming performance as both economic and political tension will likely continue to rise in the next few years.
As always, many are looking for comparisons in order to get a possible handle on where we’re headed. Is China’s current situation comparable to that of the US in 2007 or the Japan in the 1980s? Paul Krugman in the New York Times:
After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did….
I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.
Take into consideration however that predicting China’s economic future is not as facile as it sounds, and comes with many problems along the road. The Wall Street Journal elaborates:
Take 2012. A recession in Europe would certainly dent demand in China’s trade partners, and rising wages will eat into competitiveness. But if China continues to take a bigger share of global markets, that will cushion the blow from fading demand and competitiveness. The overall impact is difficult to predict.
So should we treat China forecasts with a greater degree of skepticism than we do those for mature economies? According to Mr. Kuijs, the answer is yes and no: “On the one hand, the uncertainty about the numbers is greater” he said. “On the other, China’s government feels very strongly about growth and tends to have the policy leeway to target it. So if growth weakens strongly the government can be relied on to provide stimulus to get growth back up.”