China economic slowdown likely

by: Ezra Marbach

Morgan Stanley Chief Economist Stephen Roach believes China is likely headed for an economic slowdown in the next 12 months. Here are key extracts from his latest research note:

....A China slowdown still seems likely over the next 12 months.  You wouldn’t know it from the latest slug of data just released by Chinese statisticians -- especially the May reports of a further acceleration of industrial production (+16.6% y-o-y) and ongoing vigor in fixed asset investment (+26.4%).  But there are plenty of early warning signs of slower growth ahead for China -- hints that are showing up in more reliable non-Chinese statistics.  For example, the Baltic shipping index is down by 50% from its December 2004 peak; moreover, non-oil commodity prices have softened, with the Journal of Commerce composite index of spot industrials down about 7% from its late-March 2005 high.  Perhaps the most telling sign of an emerging China-led slowdown comes from export trends elsewhere in Asia -- important cogs in China’s supply chain.  A weighted average of export growth in Asia ex China shows a deceleration from 18% in early 2004 to about 7% in 1Q05.  More recent trends in Taiwan, Korea, and Japan point to further export deceleration in the spring quarter.  Interestingly enough, this matches up well with a sharp deceleration reported in Chinese import growth -- gains of 13.8% in the first five months of 2005 versus a 36% spurt in 2004.  By using independent data on shipping activity, commodity pricing, and regional trade flows, it is possible to “triangulate