China Contracts

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Spending just $3.33 on US-produced goods every year by every person in the USA would create 10,000 jobs. We obviously don’t have that much money to spend or we don’t care. Or, we don’t produce it in the USA these days. Spending that little amount of money would be easy. But, why don’t we do it? Instead we worry over the fact that China might be doing this or cutting that. We ponder the effects of the Purchasing Manager’s Index and the Gross Domestic Product of another country rather than looking at our own labor market.

The USA doesn’t produce all of its own flags (the US imports $3.2-million worth of them from China). There are no televisions that are manufactured in the USA (since 2004 when Five Rivers Electronic Innovations went bust). Levi’s Jeans are manufactured (except for one single line of jeans) outside of the USA. Even the USA’s 2012 Olympic uniforms were made in China.

According to a survey carried out in the USA a few years ago about American sentiment regarding Made in the USA, respondents stated that 99% of them would buy American if they could and 42% said they would do so even if it were more expensive!

So, what do we do? We rely on other countries because we can’t purchase what we want at home. That means every time China starts moving up or down, we in the USA get the jitters and see our investments disappearing.

China contracted in the first quarter of 2014 according to data that is released today from a preliminary Purchasing Managers’ Index survey by Markit/HSBC. Although it is not the official PMI released by China onApril 1st, it provides a good gauge that China is not doing as well as they/we might like. The Markit/HSBC PMI takes into consideration private companies that are smaller than those that are in the official PMI for China.

The Markit/HSBC figure stands at 48.1 for March and that’s an all-time low for the past eight months.February’s figure was 48.5, which means that the Chinese are well below the level of 50 and they have been ever since the start of this year.

The world has been questioning the economic activity of China for over a year now and it seems that these concerns will be reinforced when the official figures are released. China is indeed slowing down. It can be expected that China too will now take the long road of stimulus to boost its economy. This may include:

• Lowering entry barriers for private investment.
• Spending to target public housing
• Spending on air-pollution
• Loosening monetary policy so that the economy will continue to grow at 7.5%.
• Reducing lending rates.

Already last year the Chinese economy officially grew by 7.7%, which is the same figure as for 2012. Deceleration is suspected to continue well into the second quarter of this year.

The Vice Finance Minister Zhu Guangyao stated in an interview that they would not be making the same mistakes as in the past by over-stimulating the Chinese economy.

However, the Finance Minister Lou Jiwei stated that it was the labor market that was more important than the economy and reaching healthy levels for workers was essential, even more so than getting 7.5% in economic growth. If Beijing wishes to improve consumption in the country, then the question is whether or not they will be willing to forego economic growth in the meantime while they bring that about. Secondly, how much will they be prepared to sacrifice? The Chinese economy is slowing down and some believe it will weaken even more so in the coming months. Growth is expected to fall to about 7% in 2015 and 2016.

Economists believe that this contracting is the sign of last summer’s interbank rate soaring to over 10% amid concerns that there was a credit squeeze and a shortage of liquidity in Chinese banks.

It would seem that it’s domestic demand that is proving to be the problem at the moment for China. March is expected to see a rebounding PMI in normal times, because the Chinese New Year is over and there should be a return to orders and activity. However, this is not the case. Output and new orders have been weakened according to the figures; although new exports grew.

Who will benefit from China’s contracting? Some now believe that just because China will be slowing down it doesn’t mean that the world is going to nose-dive into chaos and economic slump. The world may actually benefit from balanced growth (although commodities will certainly come in for a rough ride). But, isn’t it the Chinese state that has engineered their own economic slow-down? So, in theory if it fell too much, they would be in a position to counter-act that; or at least control means avoiding a crash-landing. If they tripped up, however, they would make the rest of us fall too. The commodity-based economies would have a knock-on effect on the rest of the world. However, it might also open up new opportunities.

If only China could get contracts rather than contracting. If only the USA had more home-made products that would mean the Americans could comfortably buy from home rather than importing and worrying about Chinese PMI.

If only pigs could fly…

Originally posted: China Contracts