China slowdown: But not to worry, says Premier Wen Jiabao

Governments are enamoured with manipulating the market. The irony is now the market is manipulating them. So the reality is that China’s slowdown is inevitable and it matters little what Wen says

Recently markets have been concerned about slowing growth in China. According to the data coming out of China, there is really nothing to worry about. Although China’s official purchase managers’ index (PMI) fell to 50.4 in May, it is still the sixth consecutive month above the 50 level indicating expansion. Still the trend does not seem encouraging. But not to worry, Premier Wen Jiabao promised that the government would pursue more proactive growth including additional spending on infrastructure and additional “fine tuning” of the economy. Most of the world’s economic experts have an almost religious respect for Chinese economic management and feel that there isn’t any problem. But are they correct?
     
China is also famous for being the factory to the world. Exports make up 30% of its GDP (gross domestic product). Although China is less exposed to a slowdown in places like Europe than countries like Korea where exports make up over half of the economy, it will be far more affected than the United States which exports only 13% of its products. So with the problems in Europe, it is hardly surprising that it reported exports rose only 4.9% from last year. This was quite a surprise to analysts who were predicting 8.5% growth. Exports actually have been slowing since the end of 2010.
     
The import numbers were far worse. The forecast was for growth of 10.9%, but China barely grew at all, only 0.3%. The imports are by far the more important indicator since China is supposed to be rebalancing its economy toward domestic consumption. Certainly Chinese consumers are not doing their part. According to a recent survey they were saving more not less.
     
But it is not just the Chinese numbers which are disturbing. China has been driving most of the growth in the world economy since the beginning of the Great Recession. Many other countries are highly dependent on its demand. Commodities, especially mining companies have been major beneficiaries. But now the boom is over. The price of metals is down more than 20 % from 2011 highs. The companies that mine the metals did even worse. The FTSE All-World mining index has dropped 31.8% from its peak in April 2011.
     
Copper is often called Dr Copper because the strength of the demand for copper is supposed to reflect the health of the world economy. In February 2011, the expectations about Chinese demand were so great that the price hit a record high, over $10,000 per tonne. It recently dipped below $8,000 a tonne. China imported so much of the stuff that it is re-exporting it.
     
According to China’s presumptive next president, Li Keqiang, the official GDP numbers were for “reference only”. To determine the real state of the Chinese economy, he relies on electricity consumption, rail cargo volumes and disbursement of bank loans. These indicators show trouble. Last April electrical production increased 11%. This year it increased only 0.7%. Rail cargo is growing but only half the pace of last year.
     
Real estate construction makes up twice as much of the Chinese economy compared to most countries, but housing prices are falling. Prices in Wenzhou declined by 12.3 %, Beijing declined 1 % and Shanghai declined 1.3%. March also saw a 50% decline in the sales of Chinese bulldozers.
     
China is supposed to be rebalancing its economy away from investment, by encouraging consumers to spend more, but the consumers didn’t get the message. Retail sales growth for April slowed 14.1% to a 14-month low
     
But not to worry. This week’s market turmoil has investors around the world predicting and expecting that central banks will step in with more monetary goodies. China is no exception. Even the IMF (International Monetary Fund) said that China “has room for a countervailing fiscal response and should use that space”. Wen’s remarks seemed to confirm this, but there is a problem. The irony is that China is already stimulating its economy and it is not working.
     
Recently the People's Bank of China delivered a 50 basis point cut in banks’ reserve requirement ratio (RRR), the third cut in six months. This is supposed to pump an additional $63 billion into the system. There is also a wide expectation of an interest rate cut. But it is not helping. The banks were supposed to lend 800 billion yuan in April, but they only managed 681 billion yuan ($108 billion). It is getting worse. Loan growth for the four largest Chinese banks in the first two weeks in May was exactly zero and there was a drop in deposits.
     
This is a major problem. The fiscal and monetary stimulus that everyone expects China to make has occurred and it is not working. Governments, and especially Chinese government, are enamoured with manipulating the market. The irony is now the market is manipulating them. So the reality is that China’s slowdown is inevitable and it matters little what Wen says.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected]).

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