Friday 23 January 2009

China Crisis goes Mainstream

Whilst I have been banging on about the unfolding crisis in China only now has the mainstream press sat up and taken notice.

The FT as always leads from the front with quality articles on the subject. In fact, the number of column inches in today's paper shows that they have taken up the challenge with gusto.

Here are some links to the juicy bits. Regular readers will be aware of most of these issues or ready. The trigger for these articles comes from the confirmation of a rapid fall in growth that has been clear from the anecdotal evidence for months.

Asian Financial Crisis Deepens [FT]

Asia’s largest economies showed stark new evidence on Thursday of contagion from the global financial crisis as China reported its slowest growth in seven years and Japan’s central bank admitted it faces two years of contraction and deflation.


China said its economy expanded by 6.8 per cent in the fourth quarter compared to the same period the year before, confirming the rapid cooling that has seen the rate of growth fall by nearly half over the past 12 months. For the year as a whole, the economy grew 9 per cent, down from the revised 13 per cent growth rate in 2007.


Fearing social unrest if the economy slows too quickly, China has unveiled a huge fiscal spending plan and has significantly eased monetary policy.

One essential aspect of any recovery is the need for Asian countries to use their large surpluses to lessen the damage. This does appear to be happening but Asia and the West must not reply on Asian consumers to increase spending to save us. In all likelihood saving rates will be flat or even rise in this recession.

Only by spending can Asia save itself [FT]


China, a country that has become accustomed to double-digit growth, may now be flirting with contraction. Indicators such as electricity usage suggest a sudden, juddering slowdown. Even the imaginative massaging of China’s official state statisticians has not been able to hide a slowdown in their analyses.

These nations cannot simply wait for the crisis to end. As long as they are built to export, they will siphon off whatever demand the deficit countries can whip up. This helps keep their customers in crisis. It is in Asia’s interests that it should correct its imbalances by increasing consumption at home. This should not be a bitter pill for the region to swallow, especially when the alternative is a prolonged world recession.

The key issue I have tried to highlight in previous posts is China's reliance on trade which I believe is far more important than commentators seem to suggest. The domestic market is simply not developed enough to take up the slack. This appears only now to be sinking in (and China's economy with it).

Region pays dear for its dependence on trade flow [FT]


China appears to be giving the matter due attention. It is also suffering an external shock, compounded by the consequences of overly successful efforts at cooling an economy that was rampaging along at 13 per cent only a year ago. By the fourth quarter of last year, growth had fallen back sharply to an annualised 6.8 per cent.

Beijing has changed tack rapidly. It is now promising to spray $586bn through stimulus measures. In response, bank lending surged in the fourth quarter, raising hopes that public funds are seeping into the real economy. Authorities in both Washington and London must be watching enviously. As Andy Rothman, China strategist at CLSA Asia-Pacific Markets, says, new bank lending has been engineered by "the world's most liquid financial institution, the Chinese Communist party". Even retail sales have held up, rising more than 20 per cent last year.

Amazingly, some policymakers in Beijing are now worried that provincial and municipal leaders may use the stimulus package as cover to pour their own money into pet projects. The concern is that, in six months or so, authorities may have the headache of tackling inflation once again. That may be the most optimistic thing anybody has said in months.


No comments: