Is a Hard Landing in Store for China's Economy?

China showing any signs of bottoming out is a function of how its exports perform. Reports say:

…China’s growth may have slipped to 5.5 percent last quarter, the weakest pace in at least 15 years, as recessions in the U.S., Europe and Japan cut demand for exports, according to Shanghai- based Industrial Bank Co.

The Purchasing Managers’ Index rose to a seasonally adjusted 41.2 in December from 38.8 in November… A reading below 50 indicates output contracted.

A measure of export orders rose to 30.7 from 29 in November. The output index jumped to 39.4 from 35.5. The new-order index rose to 37.3 from 32.3. November’s levels were the lowest for each of those indexes since the survey began in 2005. …

The economic slide may intensify pressure on the central bank to keep cutting interest rates after five reductions in three months and as the government rolls out infrastructure spending...

…forecasts the key one-year lending rate will fall by at least 81 basis points from 5.31 percent in the first half of this year.

Earlier it was reported that Chinese exports were down over the past year, the first year-over-year decline since 2001.

The $584bn China stimulus is expected to start having some impact from the second quarter. But the main factor would be the expected revival of the western markets after the second quarter which would then give a fillip back to Chinese exports. If this for some reason does not happen or is delayed, then we may see some serious dumping by China causing prices worldwide to fall and adding to the deflationary trend. This could lead to protectionist tendencies to increase, leading to a global slowdown in trade with attendant political and economic consequences.

The politics of trade is likely to increase as it is reported that:

Obama’s advisers are considering including a “buy American” provision in the economic-stimulus legislation that the incoming administration has made its first priority.

“We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs, including jobs in manufacturing,” said Jen Psaki, a spokeswoman for Obama’s transition team.

Experts also opine that one needs to watch the effect of this downturn on China’s labor intensive industries than the capital intensive ones as the unemployment numbers will be largely a function of this. Current urban unemployment is reported to be at 9.4%. The export sector employs about 50mn of which 4mn or so have been laid off. It is estimated that any fall of GDP growth rate below 5% can bring in social unrest. According to a Time report:

At a December speech, Premier Wen Jiabao confessed to being particularly worried about unemployed workers and university graduates. Even the head of the country's Supreme Court warned judges to take social stability into mind when passing rulings. Overseas, too, worry swelled about just how deeply China's fragile social compact might be shaken by the experience of economic hard times for the first time in 30 years. The Obama administration should have a contingency plan for "what we would do if there's a major collapse of the political order," Roderick McFarquar of Harvard, one of the world's most respected China scholars, recently told a reporter. (See photos here of China on the wild side.)

China’s downturn can affect certain other neighboring countries too. It is in a way the assembly plant of component and part imports from Japan, South Korea etc.

A hard landing in China could therefore have far reaching effects.

Disclosure: No positions.

Comments

[investor88:]

The downside risk of a hard landing for China is quite real.

Jan 13 07:24 AM

[Ben Gee:]

Are we over concern about the Chinese economy? China's economy is probably in better shape than any other major economy. China has the biggest reserve of money and the largest army if needed. I am more concern about the economies of US, Europe, Japan, S Korea, Taiwan than China's.

Jan 13 08:49 AM

[Richard Bru...:]

“We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs, including jobs in manufacturing,” said Jen Psaki, a spokeswoman for Obama’s transition team.

Notes to Obama transition team:
1) There is a difference between "Made in the USA", American made in China, Chinese made in America and Chinese made in China

2) Going back to "Buy American, it could be your job" could potentially be a problem for some of America's biggest firms (read: biggest employers) as their products made in China are boycotted, and their profits fall

3) Why is it that no one speaks about the huge gains that have occurred in the US logistics industry as a result of trade? Has anyone considered the thousands of logistics professionals that could be laid off once containers stop flowing, the thousands of construction workers who would have been expanding ports, the truck drivers, and so on?

Protectionism is a bad idea all around, especially when those in the drivers seat are unable to see a lot of blind spots. "Buy American, it could be your job" will result in a lot more downside than up, and it is my hope that the Obama team drops this idea before they find themselves with a few thousand dock hands asking for a bailout.

R
allroadsleadtochina.co...

Jan 13 10:41 AM

[Urbane Gori...:]

Maybe 'All Roads Lead to China" should consider that no-one was upset when workers here in the US lost their livelihood to offshore factories. If people like Kudlow and Fiorina were so adamant that losing American jobs was good for America, can you really expect that the displaced will be crying over a few container management spots?

One of the more poignant scenes I've viewed lately was an unemployed Mid-Westerner shopping at Wallmart. When asked why she was shopping there as Wallmart was causative in her losing her job, she looked confused and replied that she was on welfare and could only afford to shop there now.

jegan ;-)

Jan 13 05:09 PM

[Richard Bru...:]

Jegan

1) I am not sure I understand your point here.

"Maybe 'All Roads Lead to China" should consider that no-one was upset when workers here in the US lost their livelihood to offshore factories."

People have been angry about offshoring for the last 5 years, and Schumer's bill 3 years ago was in response to that

2) We are not talking about a few container management jobs. We are talking about thousands of dock workers, truck drivers, and freight forwarders. Nearly every firm has internally hired logistics and quality professionals who potentially are at risk now as well. Cargo firms, airline firms, shipping firms... and so on.

I am not trying to imply that there is not an imbalance, or that Obama's administration should not look to spur domestic investment in Jobs. What I am saying is that a "Buy Ameican" campaign is not a way to do that.

That to bring in a protectionist movement, the risk of hurting American firms producing offshore, and those people who have jobs supporting the movement of those goods, will pay the political price.

With regard to your anecdote about the Wal-Mart demographic, keep in mind that consumers play a huge role in this. That American consumers have as a collective group been looking for "everyday lower prices", and as collective decisions were made, many firms were force to look globally to find cheaper sources.

There are other options on the table.

R
allroadsleadtochina.co...

Jan 13 08:22 PM

[sidney:]

Another question might be to what extent the market sentiment has already priced in a hard landing. I might suggest that the negative sentiment already reached an extreme that factored in a worst case hard landing...

Jan 13 08:23 PM