China's Growth Decay; Chinese Policy To Stem The Crisis Has Failed

by: Randy Lacen

China's growing domestic production since opening up its global trade to foreign investors in the 1970s has been second to none. China's gross domestic product currently makes up 12% of the world's total GDP and is responsible for about 6% of world output in 2012. In 2007, personal household consumption in China made up approximately 35% of China's GDP while China's global trade exceeded $2.4 trillion dollars at the end of 2008 and accounted for about 56.7% of GDP for the mainland economy that year. Be that as it may, China's bustling economy became subject to an overwhelming strain on its growth margin throughout the 2008-2010 financial crisis, marking a sixth consecutive quarter of contraction for GDP within the Chinese economy stemming from March 2011 to September 2012.

China's official manufacturing purchasing managers' index was below 50 for a second consecutive month in 2012, as China reported a 49.8 reading in September 2012 for PMI after a sluggish reading of 49.2 in August of 2012 as the Chinese economy has already slowed for six consecutive quarters. A seventh quarter slowdown is now more likely to unfold.

Speculators are now taking a second look at investing in China as it becomes center stage for global business after the financial crisis. China has yet to turn a profit since the global liquidity crisis bottomed in March 2010, as the Chinese economy continues to steadily transition from emerging economy to developed world. China's response to the global financial crisis of 2008-2010, has many economists the likes of Nouriel Roubini anticipating the worst for the mainland. Mr. Roubini cautioned in 2012 that China could face a deeper recession if its growth rate were to slow to even as high as 6 percent. Roubini argues that "China needs to maintain at least a 9 percent growth rate just to handle its growing labor force and move farmers to the urban sector. China may be in for a hard landing," Roubini writes.

As the World Bank downgraded China's growth rate to 7.7% in 2012 and 8.2% in 2013 from 8.6% earlier in the week, current Chinese policies to stem contraction in China have also failed. Any forecasts on the Chinese economy, according to independent blogger Zarathustra, will depend on what the government will do. "The government should be able to generate GDP growth at costs, at least theoretically speaking, but the firepower that is required this time will be greater than last, in our view. Also, we have maintained for months now that the government is reluctant to put in massive stimulus." Zarathustra goes on to say in his latest post to Also Sprach Analyst: "It has to be stressed that the massive stimulus after 2008/09 crisis has been widely regarded as a mistake within China by policymakers, as there is a case to be made that some within the central government have the same view as well."

China's historic $586 billion dollar stimulus issued on November 10, 2008, led the financial recovery in secondary markets back in 2008 as Beijing was held to the highest standards for responding swiftly to the global recession and unleashing a four-trillion-yuan stimulus package late 2008. This move pushed the Asian economy into double-digit growth. China's growth fell to 8.1 percent in the first quarter of this year from 9.2 percent in 2011 as a whole, as woes in key export markets such as Europe and the United States hit its overseas sales. China is still applauded by any means today for its bold policy move and was urged during the heat of the crisis by global leaders to lend a greater financial hand such as increasing its own imports, while Europe and the U.S. imploded.

Now China finds itself on the opposite side of the fence, as Alcoa cut its global aluminum forecast October 9, 2012, on China's slowdown concerns. Investors are worried that Chinese policymakers will fail on passing a stimulus package in 2012 to boost growth and demand within China, and manufacturing will continue to struggle into 2013 if China backs out of its long-term commitment to the financial community. "We do see a slight slowdown in some regions in end markets, and the main driver for this is China," Chairman and Chief Executive Officer Klaus Kleinfeld said in a conference call with analysts. Chinese demand may pick up at the end of the fourth quarter because of stimulus spending, he said. Not to mention private-equity investors are also facing tougher times in China, as private equity firms operating in China received $2.1 billion in the first half of 2012 from sales in investments, which is less than half the amount in the same period last year. According to the Wall Street Journal, "Private-equity-backed Nobao Renewable Energy Holdings has also twice withdrawn its listing plans, blaming poor market conditions. The company first announced plans to list on the New York Stock Exchange in June 2010 and then again in May 2011. U.S. private-equity firm Silver Lake Partners and venture-capital firm Tsing Capital are among the groups with stakes in Nobao that would have received cash from a successful IPO." The Journal goes on to say: "Chinese firms have had a tough time selling shares in the U.S. following questions about accounting at some mainland firms. Hong Kong's IPO market has fallen victim to investor wariness amid a slump in the stock market."

The business community is now locking in profits ahead of the quarter-end on concerns how long China's economic slowdown will persist. Large-cap financial shares in Hong Kong such as Chinese banks saw profit-taking as investors took money off the table after the sector had enjoyed a strong run as major central banks stepped up efforts to ease policy. The secondary markets now await confirmation from the Chinese government stating it will pass an additional 8 trillion CNY worth of economic stimulus to soften a potential hard landing in the world's second-largest economy. Tianjin, a major port city in northeast China, has committed to a four-year plan worth 1.5 trillion CNY to 10 industries. Guangdong, the center of China's export industry, has also allotted 1 trillion CNY worth of funding distributed across 177 projects. Even Guizhou, which is considered a poor province, has chipped in 3 trillion CNY worth of investments to boost its eco-tourism and national parks.

So the question on everyone's mind at the moment... Is the PBOC more than happy to see unprofitable export numbers out of China and GDP growth contract in Asia, while China remains the only major economy that has made little to no progress since the credit-crisis bottomed in 2010?

Ladies and gentlemen, China needs another bailout.

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.