Economic news coming out of one of the massive engines of world economic growth leading up to the global crisis is increasingly bleak. China's economic outputs and financials are piling on evidence that the country will face a hard landing over the next year. The extent of China's hard landing will have implications for both the depth of the current global downturn and the speed and extent of the recovery in the future.
In February 2009, China's exports collapsed by a massive 26 per cent as the fall in global demand hits the world's biggest emerging market. Demand for Chinese products has dropped away significantly as the world economy experiences a sharp fall in demand and output. From an expected seven per cent growth a few months back, then to five per cent, some are even saying that the great Chinese economy could actually fall this year.
Chinese manufacturers across all provinces are reducing inventories and cutting production. The fall in Chinese growth and exports will create further pressure on commodity prices, including coal and iron ore among others. Chinese house prices in 70 major cities have seen a 1.2 per cent decline over the past month, the first fall since the government started issuing the data in 2005. In some regions, such as the export centre of Shenzhen, falls of 15 per cent have been seen.
Outside most Chinese ports, a growing number of ships laden with huge volumes of commodities such as ore are facing increasing delays to unload their freight as demand drops off with already huge stockpiles onshore. Around 10 million tonnes of ore are stocked at ports, increasing by over 200,000 tonnes a week.
China's power consumption – one of the best indicators for industrial production – fell in January and in February by 3.7 per cent compared with 2008.
The fall in Chinese economic growth will also have an impact on the already weak prospects for global growth. Inextricably tied, the world economy may not see any growth in 2009. Economic contraction in China may be on the cards if the global recession deteriorates any further.
As with other major world economies, the Chinese authorities have embarked on a stimulus package amounting to $586 billion (Dh2.1 trillion) in an attempt to reignite growth in the economy. However, any immediate positive impact is unlikely with greater downside risk still more probable. If the latter was to occur, the commodity prices would come under further pressure. The capacity for the government to influence growth is more limited today as it controls a lower estimated 20 per cent of GDP.
An increasing number of market analysts are of the opinion that GDP growth in China this year will be very weak, hit by the recession in the US, Europe and Japan. Other macro-economic indicators are weakening rapidly. The Chinese Government has recently estimated that 20 million labourers have lost their jobs. For 2008, profits at 350,000 enterprises in China grew at just four per cent compared to 38 per cent in 2007. Chinese corporations are cutting their investment significantly and this, in turn, will hit the economy further.
The Chinese downturn will have negative repercussions for Asia, the Middle East and the world. A major downturn in China reduces growth support in the rest of Asia, leaving the region more vulnerable to weakness in the US and Europe. Economists believe most vulnerable are Asia's smaller, trade-dependent economies such as Taiwan, South Korea and Singapore. However, Asia could come out of the downturn sooner as leverage levels are comparatively low compared to most regions and countries.
The rapid downturn in the Chinese economy dispels any earlier market belief that China was immune to the global financial crisis. In the global market place today with economic globalisation, there are few countries which are immune to the financial crunch.
Source: Emirates Business
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