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A Few Chinese Bad News Bears To Spoil A Happy New Year

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By EconMatters

Goldman's Jim O'Neill noted in a recent interview that the world's future prosperity depends on China's growth. While we don't totally agree with that assessment as we see China as one of the many contributory factors towards world's future, there are some recent bad news bears coming out of China that could spell troubles for markets, at least in 2012. 

 

Export Growth Could Drop to Zero in 2012 

 

The General Administration of Customs released November trade figures showing export growth continued to decelerate and was at their most sluggish in two years.  At a news conference, China's Commerce Ministry spokesperson warned,

"The overall trade environment next year for China will be complicated, partly due to the economic uncertainties in the European countries, and I should say that the export situation in the first quarter of next year will be very severe."

Wang Tao, an economist at UBS Securities noted China's growth is expected to "drop to zero in 2012," which will have a "sizable negative impact on the economy," and that the export figures underline "shifts in the export structure - some traditional lower-end and labor-intensive sectors may be losing market share to cheaper producers." (See Chart Below) 

 

Chart Source: ChinaDaily.com, 14 Dec. 2011

 

FDI Sees Its First YoY Drop in 28 Months 

 

Part of China's recent explosive growth has to do with foreign investments pouring into the country to capitalize on the expected burgeoning middle class income growth. But in November, China experienced its first year-on-year dip of 9.76%  in Foreign Direct Investment (FDI) in 28 months primarily from a sharp drop in inflows from the United States, while investments from the European Union -- China's single largest trading partner -- were essentially flat.  (See Chart Below).

 

Moreover, this drop came on top of the first net capital outflow from China in four years in October, asinvestors fled emerging markets due to Europe's festering debt crisis.

 

 

Chart Source: ChinaDaily.com, 16 Dec. 2011

 


Manufacturing Tanks To Near Three-Year Low

 

China’s manufacturing contracted for the first time since February 2009 with the Purchasing Managers’ Index (PMI) fell to 49.0 in November from 50.4 in October.

 

The December number did not bode well either as the HSBC flash manufacturing PMI an early indicator of China's industrial activity, showed China's factory output shrank again in December after new orders fell. (See Chart Below)

 

Chart Source: HSBC, 15 Dec. 2011

 

PBOC Reversing Course - How Bad Is The Economy? 

In early December, PBOC (The People's Bank of China), China's central bank, announced the first cut in banks’ reserve requirements since 2008, just two hours before the U.S. Federal Reserve led a global dollar liquidity injection to ease Europe’s sovereign debt crisis.  And there could be more easing on the way, as Reuters reported that data showed Chinese banks made 562 billion yuan of new loans in November, a shade more than forecast as Beijing gently eases tight credit conditions.

 

China has made controlling prices a top priority this year and implemented a series of tightening measures.   Inflation fell from a three-year high of 6.5% in July to 4.2% in November, which is still above Beijing's current inflation target of 4%.  And China's inflation battle is far from over as rising labor costs and higher input prices are among the factors that will continue to push up consumer price levels.

 

So the more interesting question is how bad is the real economy for China to reverse course taking on the risk of re-surging inflation pressures?

 

Escalating Social Unrest

 

Inflation and social unrest goes hand-in-hand and has toppled quite a few governments in the history book.  Judging from the recent Wukan Siege, the social unrest in China (due to disputes in wages, land grab, etc.) seems to have escalated in both scale and duration.  This could suggest a more serious mid-to-long-term undercurrent that would be challenging and delicate to handle for the central government.

 

Conclusion

 

From what we discussed so far, it is evidenta pronounced China slowdown in the next year or so is inevitablewith the nation's export-centric economy struggling with waning global demand, while undergoing domestic structural economic and demographic shifts.  Moreover, there could besome hidden debt bombsas a recent Bloomberg finding suggests that China's banks may be understating their exposure to runaway local borrowing by possibly billions of dollars that is raising fears of a government bailout.

 

How Beijing steers its economic and monetary policies in the next 2-3 years will be key to balance the country's inflation, growth and stability.  While we see a very low probability of a hard landing case for China, but if Jim O'Neill is right about how much the world depends on China's growth, then don't count on that much world prosperity, at least in 2012.

 

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Mon, 12/26/2011 - 10:47 | 2011680 mailll
mailll's picture

It's funny how investors can make or break a country.  As investers pull out of China, China will slowly implode.   And their banking system may be on the verge of collapse also, since most of china GDP is construction related, and building buildings which no one occupies is not a good economic practice.  And if the dollar collapses, as some say it will, the value of their dollar holdings will be worthless.  Problem with all this is that as the Chinese economy slows, they will turn more and more to their military might.  Wars have always created a diversion from the real issues.   The Chinese people will turn more toward their government instead of away from it in times of war. At least this will be their reasoning.  The US can grow from all this but the problem is that the Elite (Illuminati?) will continue to try to destroy and enslave the US.  Whoever controls the money (world financial system) controls the world.  They have more control over the world than all the armies of the world do.  The future doesn't look too bright. 

Mon, 12/26/2011 - 15:03 | 2012032 tictawk
tictawk's picture

"And if the dollar collapses, as some say it will, the value of their dollar holdings will be worthless. "

The value of dollar has already collapsed as evidenced by a 20 year chart of the dollar index.  The Fed in its fervent desire to promote debt has DEPRECIATED the dollar.  Most investors purchased dollar based assets and expected the asset prices to RISE because of continued depreciation of the dollar.  Now that the bubble has burst, how can anyone expect the dollar to continue to depreciate?  Consider that the dollar is a DEBT based instrument and therefore what we will see is appreciation of the dollar as the debt collapse intensifies.  At some point, if there is a systemic credit freeze, the question of what to do with the dollar will become a political decision i.e. should they print to destroy the dollar or let defaults run their course.  I suspect that the latter will prevail and any attempt to print will only create a greater freeze in the credit markets.  

Mon, 12/26/2011 - 04:25 | 2011436 lolmao500
lolmao500's picture

Even better, Taiwan has elections on January 14... if the nationalist win, you could very well see China invading Taiwan.

Mon, 12/26/2011 - 09:12 | 2011579 Wu Qi Ming
Wu Qi Ming's picture

Interesting observation.

 

Having lived in China now for 7 years, every year I note aloud the best time to invade China would be in their "Spring Festival" (AKA Chinese new year) as the constant sound of fireworks would mask any shelling. Same would apply to Taiwan. This year the Chinese New year is centered around the 23rd of January.........

Mon, 12/26/2011 - 03:12 | 2011369 fenner
fenner's picture

According to Chinese fortune-telling, the year of Dragon will not be good for China and the rest world as well.

Mon, 12/26/2011 - 02:35 | 2011348 non_anon
non_anon's picture

year of the squid

Sun, 12/25/2011 - 23:26 | 2011044 bill1102inf
bill1102inf's picture

China has already manufactured NEXT YEARS christmas gifts and has them in warehouses.

Sun, 12/25/2011 - 23:32 | 2011056 Pythaes
Pythaes's picture

next year's tear gas as well?

Sun, 12/25/2011 - 23:05 | 2010999 disabledvet
disabledvet's picture

Says as much about prices as it does about growth. A perfect deflation is emerging with only one entity making combating this menace job one: Bernanke's Fed. Obviously even if gold simply maintains it's price that makes for a an amazing store of value in an environment where prices fall...or even collapse. Of course the same is true of equities: simply maintaining...while still paying dividends if not raising them...and that is an awesome store of value as well. Of course nothing beats the government debt of the USA in this scenario. Those interest rates could fall dramatically under this scenario.

Sun, 12/25/2011 - 22:41 | 2010958 Peter Pan
Peter Pan's picture

The USA once thought that China was going to be some dumb arsed export destination for its industry. With that stupid assumption gone, we now have China's assumption that the USA can be the eternal customer also being proven dangerous and wrong. The third stupid assumption by both of them is that they can keep the show going through a combination of bad accounting tricks and even worse money printing/pumping. What wil the next dumb approach that we will winess?

Sun, 12/25/2011 - 22:28 | 2010939 RockyRacoon
RockyRacoon's picture

Cliché, yes, but the bigger they are, the harder they fall.  How apropos.

Sun, 12/25/2011 - 22:26 | 2010936 CreativeDestructor
CreativeDestructor's picture

""we see a very low probability of a hard landing case for China""

give me a fukin break!

Sun, 12/25/2011 - 22:19 | 2010928 ucsbcanuck
ucsbcanuck's picture

And that doesn't even begin to take into account the real estate bubble collapse.

Luuuv my FXI puts

Sun, 12/25/2011 - 22:07 | 2010916 PulauHantu29
PulauHantu29's picture

Billionaire RE Devolopers & Bankers stole the show there as some other places.

Sun, 12/25/2011 - 21:24 | 2010866 DarkStarDog
DarkStarDog's picture

China banksters are just as in deep doodoo as the rest of them around the globe, but not as bad as the USA banksters. American banksters should of went bust long ago, but they will keep stealing and lieing as long as the have buddies in the beltway and the tv stations keep brainwashing the sheeples of merika.

Sun, 12/25/2011 - 21:01 | 2010851 Georgesblog
Georgesblog's picture

The best I can say is that this doesn't come as a surprise. No production economy can prosper by selling into a declining market. Not only is China's export market declining, but manufacturing decline now feeds into the decline of the domestic market. It's a vicious circle. The global economy is based on another vicious circle, the fiat currency debt system. Where does it come out? History says it never comes out, as good as it used to be.

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

Mon, 12/26/2011 - 00:40 | 2011173 Dirtt
Dirtt's picture

Deflation in what no one wants and inflation in what everyone needs.

Well done Ben.  The only question we might have: Was it by design? I think yes.  The biggest Landlord in the USA will be Squidly...on pennies on the dollar.

Mon, 12/26/2011 - 09:10 | 2011578 Manthong
Manthong's picture

“the world's future prosperity depends on China's growth.”
Maybe it’s just me, but something about that statement is a bit more than disconcerting.

Mon, 12/26/2011 - 11:09 | 2011709 Vendetta
Vendetta's picture

the disconcerting thing is the bullshit of the statement.  25 cents an hour labor rates doesn't add up to a 'middle class' no matter what the globalists want everyone to believe.  Therefore an autonomous and sustainable economy will never occur.  Trade used to be, before it was perverted by shysters, trading what 1 nation cannot produce due to know-how or resource availability limitations with another nation that does have such know-how or resources ... not wage arbitrage between national scales of economy.

Mon, 12/26/2011 - 13:22 | 2011878 laomei
laomei's picture

You really have no clue about how much cash Chinese have.  In most cities, the "middle class" is richer than your so-called middle class.

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