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Storm Clouds on the Horizon in China?

China’s abnormally low 8.1 percent GDP growth in the first three months of the year was initially viewed as insignificant. Many China watchers thought the economy would quickly return to the heady days of 9–10 percent growth, but industrial production, investment, retail spending, and trade data have all been much lower than expected. Even other economic measures, such as electricity output, rail cargo and bank loans, have slowed considerably. The bulls are beginning to retreat.

And now, according to reports from the Financial Times, China’s manufacturing sector is experiencing a similar deceleration:

The official purchasing managers’ index for manufacturing fell to 50.4 in May, its lowest in five months, from 53.3 in April. Although it was the Chinese PMI’s sixth straight month above the 50 level, which signals an expansion of activity, the fall in the index highlighted a clear slowing of growth momentum. . . .

“The big decline in new orders indicates that new business activity will decline, leading to a continued fall in economic growth,” said Zhang Liqun, an economist with the Development Research Center, a think-tank under the cabinet.

The host of poor April data had led to speculation about another round of government stimulus, similar to what was introduced in 2008 and 2009. But Beijing quashed those rumors. With the Chinese economy still dealing with high inflation and troublesome bank debts from the last round of stimulus, the government will have to dig deeper into its policy toolbox this time.

While it is too soon to announce the end of the era of double-digit growth for the Chinese economy, the forecast gets cloudier by the week. Where China goes from here, and how it handles the political and social ramifications if its economy is indeed entering a new phase of lower growth, will be one of the defining stories of 2012.

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  • Jacksonian Libertarian

    Why is it too soon? Isn’t China’s export model economy dependent on the importing economies ability to buy? Does it look like the US and European economies are suddenly going to BOOM and want more Chinese junk? Isn’t China’s flat energy consumption more likely to mean that growth in production and supplies has ended, that the 8% growth number is all lies, and that China isn’t growing at all? Isn’t China more likely to raise interest rates and go into recession to fight the inflation?

    China is no longer forcing its banks to send their entire dollar deposits to the central bank; this means that China is no longer be manipulating their currency against the Dollar. China’s exporting businesses will no longer enjoy a price advantage as they have for decades, and massive dislocation in the Chinese economy will now ensue as its economy is exposed to highly increased competition (the inefficient state owned businesses will suffer the greatest losses). Since nothing the Chinese produce can’t be produced as well in some other country, and the loss of the price advantage due to currency manipulation, the lower cost labor in other countries is going to take market share from China in short order.

    China is hitting the wall NOW, and it isn’t going to be a gentle crash. With the massive corruption common to Authoritarian governments, lack of legitimacy conferred by Democracy, injustice from the lack of the Rule of Law, pent up cultural aspirations from decades of exposure to the bleeding edge American Culture, and the dashed hopes and dreams of a newly elevated middle class numbering in the 100’s of millions; this will be a Perfect Storm of a crash. It is going to be incredibly bloody, Boxer Rebellion bloody, Cultural Revolution bloody, bloody like the Chinese can do bloody.

  • Luke Lea

    I’ve just finished reading Country Driving and Factory Girls, two great books by Mandarin speaking American reporters about what its like on the ground in the Chinese boom towns. I can’t recommend them highly enough if only to put a human face on what is happening in China. The stars of the story are millions of 15-to-25 year old Chinese girls who work 70 and 80 hour weeks for considerably less than a dollar an hour. They live in the factories themselves, 6 to 12 to a room, and spend maybe a third of their wages on Western style clothes (high heels are big) and cell phones. The rest they send back to their older parents and younger siblings who live in the interior of the country on one acre farms. Most of these girls have a Jr. High School education and they exhibit tremendous spunk and determination. Here is a job interview:

    The best-selling self-help book in China, Circles and Squares, turns Horatio Alger on his head:

    Corruption was pervasive, that goes without saying, but what surprised me was the incompetence and short-term thinking that seemed to rule even among (especially among) the most successful. There was a fly-by-night quality to everything, and the nouveau riche lived like there was no tomorrow. The buildings in particular — factories, apartments, malls, anything made out of steel and concrete — were shoddy in construction, with corners cut and the financing shaky.

    If there is a slow-down in China a lot of people are going to lose their money — the ones wearing Prada and driving fancy cars which the Western press style as China’s “new middle-class.” God knows how the Politburo will handle it.

    The girls themselves will be fine. They will go back home. They can survive anything.

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