The China bulls of the last few years are finding it more and more difficult to explain away the evidence for a “hard landing” in the near future. Their only remaining argument is that the country will avoid this dismal fate if a dozen different things go right in the global economy – i.e., the Eurozone crisis doesn’t get worse, financial markets don’t become any less stable, the Chinese real estate bubble doesn’t implode, direct foreign investment doesn’t contract any more, the export industry isn’t further crushed, etc.
Here’s the crux of the matter from Jamil Anderlini of the Financial Times:
Some analysts believe the current slowdown is more structural than cyclical and even if the government wanted to it might not be able to do very much to spark a big rebound in growth.
“There is persuasive evidence to conclude that the Chinese economy is actually growing at just 4 or 5 per cent right now based on a composite of other indicators,” says Patrick Chovanec, a business professor at Tsinghua University in Beijing.
“Of China’s 9.2 per cent GDP growth in 2011, 5 percentage points came from investment which means that if China builds just as many roads, bridges, condos and villas as it built last year and no more it will knock five points of this year’s GDP growth. Growth is dependent on ever-rising levels of investment in an environment where that investment is not creating adequate returns.”
There obviously isn’t any concrete mathematical way to establish what China’s annual GDP will end up being, but the above inference is more than reasonable in a country where legitimate economic data is hard to come by. If it is even close to being accurate, then the Chinese economy and the Chinese people are in for a very rough ride. They are dealing with a structural collapse that can only be made worse with increased levels of reckless central planning, which is exactly what has been happening for the last few years.
While the central government has been issuing propaganda about their efforts to reduce the economy’s dependence on speculative real estate investment, their actual policies have led to increased speculation and rising home prices in almost 50 of the 70 cities tracked – twice as many as last month. These policies included two successive interest rate cuts and a subsidy to first-home buyers. The public attitude from Beijing has become increasingly schizophrenic as central authorities simply run out of ideas to balance economic growth with destructive speculation and price inflation.
They have the poweful property developers and investors on the one side telling them not to curb speculation too much, and everyone else telling them that they need to cool down the market before it turns into U.S. sub-prime on a much bigger scale. Who do you think they are ultimately going to listen to? The fact that the central government has been leaning heavily on China’s largest banks to increase lending and meet pre-determined targets tells us all we need to know. The top four banks extended twice as much credit during the first half of August as they did in the first half of July.
Yet, the diminishing returns on speculative debt are clearly starting to show within all sectors of the Chinese economy. The mish-mash of “stimulative” policies and property “restrictions” have simply kept prices high for short-term profits of investors while pushing affordability further out of reach of the average Chinese working family. And that is a recipe for disaster when the ponzi bubble finally collapses, which won’t be much longer now.
Economic expansion in the second quarter slowed to 7.6 per cent from the first quarter’s 8.1 per cent and at this pace the country appears set to post its lowest annual growth rate since 1999.
Even after Beijing cut interest rates for the first time in almost four years in early June and then cut them again less than a month later, virtually all economic indicators showed the slowdown continuing into July.
Industrial production, a key measure of manufacturing activity, grew 9.2 per cent in July from a year earlier, down from 9.5 per cent in June, while Chinese exports grew just 1 per cent from a year earlier after growing 11.3 per cent in June. New bank lending in July was also disappointing.
Some analysts are starting to contemplate what a Chinese “hard landing” would mean for the country and the rest of the world at a time when Europe is mired in crisis and the US economic engine is stuttering.
“A hard landing in China would look like the fourth quarter of 2008 and the first quarter of 2009 when exports collapsed, factories had no orders and migrant workers were laid off by the tens of millions,” says Wang Tao, an economist at UBS. “That hasn’t happened yet and probably won’t unless Europe falls apart or there’s a serious problem in the real estate market.”
Investment in real estate accounted for more than 13 per cent of China’s gross domestic product in the first half of the year and the sector has been a key growth driver for most of the past decade.
But forests of empty apartment blocks cover much of the country and land purchases for new residential housing were down 24.3 per cent in the first seven months from the same period a year earlier, suggesting future investment will not hold up.
The fact is that all of combined efforts of kleptocrats in the Chinese government have resulted in a very short-lived stabilization of the speculative economy, and now reality is coming back with a vengeance. Their best laid plans never stood a chance against the structurally unstable, debt-laden foundations of the global economy. It is truly an under-statement to say they are stuck between a rock and a hard place, and with China goes the last remaining shreds of credibility for the “global recovery” myth. The knock-on effects of China’s hard landing will echo throughout the world, and many sociopolitical powder kegs will ignite.
The impact of a Chinese hard landing would be devastating for commodity-exporting countries such as Australia, Brazil and Indonesia, which rely heavily on Chinese demand but it would also have less direct consequences.
“If China does have a hard landing it would have huge ramifications for global investor confidence and would create turmoil throughout global financial markets,” said Alistair Thornton, an economist at IHS Global Insight.
While China’s slowdown has so far been relatively mild, it has had a disproportionately large impact on corporate profits, especially for property developers and companies in real estate-related industries.
Sales of construction machinery have plummeted, dozens of small steel mills are cutting production and large state-owned mining and transport companies have reported losses for the first half of the year.
So what happens to the Chinese middle-class fantasy when the markets go haywire and the exports dry up and the corporations go bust, laying off tens of millions of already struggling workers in the process? As they say in Latin, res ipsa loquitur – “the thing speaks for itself”.
(image caption: Chinese migrant workers leave their factory construction site for a lunchbreak in Beijing on March 16, 2012. The official Chinese news agency Xinhua reported on around 1,000 migrant workers going on a rampage after the death of a worker at the hands of his employer on May 29, 2012.)