China’s Possible Hard Landing

We continue with our watch list.

China showing any signs of bottoming out is a function of how its exports perform. Reports say

“…China’s growth may have slipped to 5.5 percent last quarter, the weakest pace in at least 15 years, as recessions in the U.S., Europe and Japan cut demand for exports, according to Shanghai- based Industrial Bank Co.

The Purchasing Managers’ Index rose to a seasonally adjusted 41.2 in December from 38.8 in November… A reading below 50 indicates output contracted.

A measure of export orders rose to 30.7 from 29 in November. The output index jumped to 39.4 from 35.5. The new-order index rose to 37.3 from 32.3. November’s levels were the lowest for each of those indexes since the survey began in 2005. …

The economic slide may intensify pressure on the central bank to keep cutting interest rates after five reductions in three months and as the government rolls out infrastructure spending...

…forecasts the key one-year lending rate will fall by at least 81 basis points from 5.31 percent in the first half of this year.”

Earlier it was reported that Chinese exports were down over the past year, the first year-over-year decline since 2001.

The $584bn.China stimulus is expected to start having some impact from the second quarter. But the main factor would be the expected revival of the western markets after the second quarter which would then give a fillip back to Chinese exports. If this for some reason does not happen or is delayed than we may see some serious dumping by China causing prices worldwide to fall and adding to the deflationary trend. This could lead to protectionist tendencies to increase leading to a global slowdown in trade with attendant political and economic consequences.

The politics of trade is likely to increase as it is reported that:

“Obama’s advisers are considering including a “buy American” provision in the economic-stimulus legislation that the incoming administration has made its first priority.

“We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs, including jobs in manufacturing,” said Jen Psaki, a spokeswoman for Obama’s transition team.”

Experts also opine that one needs to watch the effect of this downturn on China’s labor intensive industries than the capital intensive ones as the unemployment numbers will be largely a function of this. Current urban unemployment is reported to be at 9.4%. Export sector employs about 50mn. of which 4mn. or so have been laid off. It is estimated that any fall of GDP growth rate below 5% can bring in a social unrest. According to a Time report:

“At a December speech, Premier Wen Jiabao confessed to being particularly worried about unemployed workers and university graduates. Even the head of the country's Supreme Court warned judges to take social stability into mind when passing rulings. Overseas, too, worry swelled about just how deeply China's fragile social compact might be shaken by the experience of economic hard times for the first time in 30 years. The Obama administration should have a contingency plan for "what we would do if there's a major collapse of the political order," Roderick McFarquar of Harvard, one of the world's most respected China scholars, recently told a reporter. (See photos here of China on the wild side.).”

China’s downturn can affect certain other neighboring countries too. It is in a way the assembly plant of component and part imports from Japan, South Korea etc.

Hard landing of China could therefore have far reaching effects.

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