China’s Storm: 2016

Pivotfarm's picture

There never seems to be a day that goes by without someone predicting that China is going to go down the Yangtze and end up some creek without a paddle. There never seems to be a day that goes by without, whatever the results from the Middle Kingdom might show, someone somewhere predicting the imminent failure ,and the West’s (read: the USA’s) revival and rebirth from the flames of financial catastrophe. Why is it that human nature in the West makes us want the ones over there to fail and for us to succeed? Wouldn’t it be possible to succeed because they are also doing pretty well?

It’s the PNC Financial Services Group that is now talking of a ‘prefect storm’ brewing in the midst of theChinese and ready to unfurl its wrath in 2016. Even Nostradamus would have had a harder time predicting what the financiers think they can get right, wouldn’t he? So will it be the ‘perfect storm’ or just another storm in a teacup as usual. All wind and no sails. China was predicted for decades to be ready to overrun the world. But, it didn’t quite happen the way people said. President De Gaulle of France said that China would be the only thing that united Europe. Little did he know that it would be Europe that would disunite Europe. China has now been predicted to fail dismally, to suffer from corruptive measures and to sink into the abysses of the darkest recesses of the economy because it has a housing bubble. Diverting the focus of attention from our own backyard is always good for the masses. The sheeple prefer that, don’t they? Life is so simple. We are good. The Chinese are bad and so doomed to failure.

Stuart Hoffman, Chief Economist at PNC Financial Services Group stated in a recent report: “Several problems long on China's back burner are likely to come to a head by 2016”. He said that China would be paying for the weakening of the credit market along with the slowdown in reinvestment and earnings as well as the impending housing-market correction. The prediction is a slowdown in Gross Domestic Product to just6%, which would be the lowest since 1990. But, didn’t people already predict that the Chinese wouldn’t be getting anywhere close to 7% even for this year already? Now we read of the expansion in the second quarter of this year of the Chinese economy to 7.5%. That was above expectations that were equally as damning a few months ago that China would only get to 7.4% in the second quarter this year. Wrong again.

What never ceases to amaze is the scaremongering economists that predict and then when they get it all wrong they simply fade away into oblivion until they predict the next downfall of the Chinese giant.

There are others that are confident about the Chinese economy. John Zhu, China Economist at HSBC stated: “A lot of economic analysis tries to extrapolate micro-level analysis to the macro-level. There are so many other variables and policy levers that could be pulled”. He believes that growth will continue around the 7%-mark and will be nowhere near 6%.

What PNC Financial Services Group fails to take into account is that we can hardly say that the Chinese are going to fall to 6% and at the same time say the West is going to increase in economic activity and that the recovery is really here to stay now. All of that will be linked. If the recovery is here to stay, then the Chinese will benefit from that since exports will increase due to our purchasing of them. If the housing market does fall then infrastructure investment in the private sector by the Chinese state will offset that. Admittedly falling prices in the housing sector are leading to fewer investments. New home prices in China fell by 0.5% (70 cities) over the past month, which is the second monthly decline in a row (May fell by 0.2%).

There is also the problem of the soaring debt in China, which has now reached 251% of Gross Domestic Product (while standing at 147% at the end of 2008). China has admittedly relied heavily on credit since 2008more and more. China has tried to slowdown growth and the reliance on credit.

Still if the worst came to the worst, what would they do? Write off their debt like everyone else will end up doing.

Originally posted: China’s Storm: 2016