Monday, May 28, 2012

That hard landing in China is looking a lot more likely!

Data that has been coming out in the past several weeks has shown a distinct contraction in the economy of China.  Unlike previous monthly claims that showed that the country was achieving its predetermined growth numbers, both April and May's numbers look at best underwhelming.  Questions are now being asked if China is in a recession?

Publicly,  April's growth in imports rose a moribund 0.3%, compared to an 11% from the previous period in 2011.  The NY Times is reporting that businesses across the country have reduced consumption of  many products, including commodities such as iron ore and high-end electronics, such as computer chips.  Exports grew only 4.9% in April; half as much as economists had expected.

Preliminary data published by HSBC and the financial information provider Markit for the month of May indicates that the Purchasers Managers Index (PMI) fell to 48.7 in May from 49.3 in April.  Indexes below 50 are considered representative of a contraction.  Whereas the HSBC manufacturing index has been below 50 for seven months.  May exports similarly fell to 47.8 in May, from 50.2 in April. 

China's National Bureau of Statistics has stated that
inflation in consumer prices slowed to 3.4 percent in April from 3.6 percent in March, while producer prices, measured at the factory gate, actually fell 0.7 percent in April from a year earlier.
Chinese government indexes show real estate prices have fallen in a majority the country’s urban markets.  Housing developers have dropped prices and some have reduced activity at constructions sites to a single daytime shift, down from a continuous 24-hour work cycle.  Demand for construction workers has sharply declined.

In a different NY Times article, the plight of local business people in Xi'an, a city of eight million in northwestern China, is highlighted.  Sun Yufang, a wholesale dealer of ovens, ranges, and water heaters,  states that local  residents have nearly stopped redecorating or outfitting apartments.  She elaborates that, “We didn’t really feel the global financial crisis, but this year, we’ve really felt it — I don’t see a solution unless people start buying,”  Likewise, Yian Leilei, a wholesaler of tablecloths and car seat covers, said that "sales nose-dived after Chinese New Year on Jan. 23 and had not recovered."

Jim Walker, founder and managing director of the Hong Kong-based economic research company Asianomics, has said that the, “Property-led growth and infrastructure-led growth is just about finished".  He concludes that more stimulus funding will have limited value, since there is already an excess of infrastructure projects, including transportation projects such as airports. 

Historically, China's economic data has been of questionable value. Senior politicians and economists within the Chinese government have said that the data, especially that arising from local offices, are frequently massaged to confirm with politburo demands.  For example, Le Keqiang, a senior communist party official, was quoted in 2007 cable released by Wikileaks that China's GDP figures were "man-made."  He explained that he reviewed only three statistics to assess the strength of the Chinese economy:
  1. Bank lending
  2. Electricity consumption
  3. Rail cargo volume 
If one is to evaluate the economy based on these metrics only, the Chinese economy is in very poor shape.  For instance, bank lending has contracted as demand for new loans and projects has declined.  Electricity production is down m/o/m  for April, while freight cargo by rail has flat-lined.  An article on The Atlantic magazine's online site discusses these issues.

The collective declines in imports and exports, a worsening housing market, depressed labor conditions, reduced consumer confidence, and sinking inflation are representative of a serious situation that points towards a fundamental hard landing occurring in the months ahead.

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