Not Immune to the World’s Woes
China now ranks second only to the US in terms of the size of its economy, having exceeded that of Japan’s, and has emerged as a key driver in the world’s economy in the wake of the global financial crisis.
Propelled by rapid urbanisation, huge infrastructure developments and an official unemployment rate of only 4%, China is a key supporter of commodity prices and an important trading partner to many countries.
In direct response to the global economic slowdown, China’s central bank oversaw a huge stimulus effort in 2009 and 2009 through the issuance of money and the encouragement to banks to lend it. This had the effect of making Chinese imports very competitive in foreign markets in that it kept the yuan weak.
This stimulus, on the other hand, sent inflation surging more than 6% and helped fuel the frenzy of property buying as investors sought a return on their money that couldn’t be achieved via the regulated interest rates paid on bank deposits.
Citizens have been getting richer, housing is going through the roof and big investment banks are buying up office space. As a result, some investors, feeling a certain sense of ‘property bubble déjà vu’, have been getting nervous.
The Chinese government have acknowledged these fears and have attempted a U-turn -implementing a variety of policy measures since last year to slow down inflation in the real estate sector, including raising interest rates and increasing bank reserve requirements. The IMF has recently cut its growth forecast for China’s export-driven economy, saying that ongoing turmoil in Europe and the United States (along with this sustained anti-inflation drive) would take a toll. The use of electricity in China, often noted a barometer of sorts reflecting the economy, was almost flat over the summer.
The potential for a sharp rise in debt defaults following a recent report by Credit Suisse has added to the concern and impacted the equity market to the downside. Reports – understandably cloudy – of local Government bodies getting into difficulty and projects souring can only make onlookers uneasy.
High end retailers in particular were hit strongly last week as the fears of a hard landing on the back of an export slow down dampened the demand for premium brands like Tiffany and Co and Ralph Lauren. This decline, in a sector that was outperforming that of the international banking sector, led many to ponder just how much purchasing power China’s nouveau riche had.
However, news that the official purchasing managers index released over the weekend inched up to 51.2 from a prior reading of 50.9 means that China is still in expansion territory, while the rebound of new export orders from 48.3 in August (a 28 month low) could offset worries about the potential for a hard landing.
By contrast, with basic resources like copper at levels not seen since July 2010 the global outlook isn’t very optimistic and China is in no way immune the European debt crisis which now threatens to spur a recession in Europe, which could in turn affect global growth.
Certainly the pronounced lack of direction and growth in overseas markets like Europe and the US have left the Peoples Bank of China with little leeway to cope with any fresh global shocks.
Looking at the historic pattern of global crises, the region which initially emerges strongest from one shock usually succumbs to its own in time. One has to wonder if China’s moment is now approaching.