Understanding the China Slowdown

June 22, 2012

Europe is being ravaged by its debt crisis and the United States is plagued by a fragile recovery.  Now, it seems that the Chinese economy, the bull of the global market place that has been a solid engine of growth, is on the brink of a serious slowdown, says BusinessWeek.

Though aggregate numbers remain strong relative to other nations, troubling signs within signaling industries lend credence to fears of slower-than-expected growth.

  • Steel inventory of five major steel products is up 39 percent since January, leaving major mills with first-quarter losses of more than 1 billion yuan.
  • Pirated movies, which adapt quickly to market demand, have dropped from a price of 10 yuan a year ago to 7 yuan currently.
  • Real estate in tourism-heavy provinces is taking a substantial hit -- 80 percent of new residential buildings in the tourist destinations of Haikou and Sanya are vacant.
  • Mobile phone sales in China are down 13 percent from a year ago, according to industry consultant Gartner.
  • Wine prices have also dropped markedly to the point that they may only recover with a successful national stimulus program.
  • Total vehicle sales fell 1.3 percent in January through April -- the worst decline since 1998.

Credit Suisse now expects China to grow at 7 percent or less this quarter, and this slowdown could be further exacerbated by a crumbling situation in Europe.  Local investment bank China International Capital warned on May 23 that if Greece leaves the Euro, mainland Chinese growth could fall as low as 6.4 percent.

The national government, it seems, will respond with another round of stimulus, following the previous episode of spending from three years ago.

  • The latest stimulus could cost 2 trillion yuan ($315 billion), estimates Credit Suisse.
  • A portion of the stimulus will be dedicated to subsidizing consumer purchases of energy-efficient energy appliances.
  • Further development efforts will be concentrated on infrastructure, with expansions of airport projects in the provinces of Xinjiang, Chongqing and Sichuan.

Stimulus efforts will have to proceed with caution, however: the previous spending spree led to widespread overbuilding and waste.

Source: Dexter Roberts, "Understanding the China Slowdown," BusinessWeek, June 4, 2012.

 

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