The New Year started earlier this month is a Jiawu Year. This is based on the traditional Chinese calendar which uses 10 "heavenly stems" paired with 12 "earthly branches" to form the ganzhi (stems and branches) sexagenary cycle, a method of recording days which dates from the earliest written records in China.
Sixty years ago, during the last Jiawu year in 1954, a great flood happened on the Yangtze River, forcing more than 18 million people to leave their homes and causing nearly 20,000 deaths, even more significantly, the Jiawu year prior to that is remembered in China as the year of the Jiawu war, the 1894 Sino-Japanese War which dealt China a devastating blow and signaled the beginning of the country's humiliating slide into poverty and backwardness.
Therefore, on the occasion of another ominous Jiawu year, there is some expectation that not only could the Chinese economy face serious challenges, but the country itself may again experience some form of a national disaster. These fears are further fuelled by rumors that some tycoons divested themselves from the mainland China and Hong Kong last year because they are expecting a major incident during this Jiawu year.
Although some people may condemn the superstitious nature of the expected "Jiawu Year Crisis," the data show that there are reasons for the lack of optimism regarding China's macroeconomic outlook.
Specifically, now that the country is making great efforts to fight against corruption, and the central government is advocating thrift and an end to extravagant expenditures on luxuries, it is unlikely that there will be significant growth in domestic consumption. For example, the latest data from the Ministry of Commerce show that total sales in the retailing and catering industry were about 610.7 billion yuan (US$99.3 billion) during the Spring Festival Golden Week, a gain of 13% over last year, which would normally seem to be a significant increment except for the fact that it is the lowest increase in six years. As the country's most important festival, its role as a benchmark cannot be overlooked.
Furthermore, although China recently surpassed the U.S. to become the world's largest trading nation, the meager increase in exports of only 7.9% in 2013 is not likely to change in the short term, thus the probability of boosting export growth based on the recovery in the U.S. and Europe does not seem great.
Among the three factors driving China's economic development, fixed-asset investment is still a major driving force. In 2013, fixed-asset investments were 43.7 trillion yuan (US$7.1 trillion), an increase of 19.6% over the previous year, while the sum of consumption and exports were only about 47.4 trillion yuan (US$7.8 trillion).
Therefore, although China is actively committed to establishing a more market-oriented economy, it is clear that the core strength of current economic development is still dependent on government policies. These policies will also play a decisive role in determining whether China can cope with an extreme economic downturn.
A decline in GDP growth in 2014 would not be sufficient to lead to a crisis, even if the growth rate is less than 7%. At worst, it will lead to a short-term economic downturn. But it should be noted that there are other problems that have been exposed during the recent economic slowdown.
For example, it is now clear that the shadow banking industry might face default, and has recently attracted widespread attention. Perhaps this is an early warning of risk. According to statistics from the People's Bank of China, trust companies and other shadow banks provided 5.2 trillion yuan (US$845.5 billion) of loans to enterprises, accounting for about 30% of the annual volume of 17.3 trillion yuan (US$2.8 trillion) of social financing, and an increase of 23% over the previous year. This statistic is very conservative, but it shows that the total amount of shadow banking increased sharply in 2013, as a result the accumulated potential risks have not been eased but will continue to increase.
In addition, shadow banking capital basically flows to enterprises which are unable to get finance in other ways. These loans have high risks because these enterprises must bear high interest and related costs combined with generally weak levels of profitability, so they will be the first to go bankrupt when the economy starts to slow down.
Moreover, the high debt levels of local governments and their limited ability to repay these debts can also be considered to be an area of focus for a possible crisis. Also, one cannot neglect the possibility that the real estate bubble will burst. This would prove to be even more lethal to the Chinese economy.
The occurrence of any one of these scenarios would be a heavy blow to the banking and financial sectors, directly leading to a serious decline in economic growth.
Furthermore, the political risks China may face this year should not be ignored. For example, although the new government has had great success in its efforts to reduce corruption and privilege, and to get the full cooperation of governments at all levels in strictly implementing relevant regulations, there is the fear that some interest groups, once deprived of their privileges, may try to disrupt the reforms and even engage in malicious activities.
In addition, if China and Japan cannot resolve the impasse in the Diaoyu Islands, misfires are very likely to happen, as I outlined last year, China's economy faces a rough ride in the next few years. If current trends continue and Japan continues to provoke and take risks, the situation is only likely to worsen leading to the very real possibility of another Sino-Japanese war at sea. It is also worth noting that Japanese Prime Minister Shinzo Abe recently likened Sino-Japanese relations to Anglo-German relations just before the outbreak of World War I. We all need to be cautious when reflecting on such a statement - it may just be a simple slip of the tongue or it may have a much more serious connotation.
Therefore, for the more pessimistic, China may face internal and external "troubles" in 2014 which could include any or all of the following: a slow-down in economic growth, mass defaults and or exposure to the risks inherent in the shadow banking industry, the spread of real estate market problems such as those that occurred in Wenzhou and Ordos, struggles by local governments and state-owned enterprises in promoting investment in fixed assets, and more seriously, the possibility that continued provocations may force China to fight a war against Japan at the same time as a small number of domestic interest groups take the opportunity to launch an attack on the current central leadership. As the saying goes, when it rains it pours!
Of course, these are the worst case scenarios; the probability of their occurrence is not very high, but it is absolutely essential to raise our level of awareness and risk prevention.
Finally, I have done extensive research into the Jiawu years and the history books tell us that they have not always been hard times for China. Small setbacks will not prevent the country from gradually becoming more powerful and prosperous, and it is well known that no road to success for any people or country is smoothly paved. But knowing this, if the New Year does bring us some unpleasant surprises, shouldn't we still be alarmed?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.