The main reason why the Chinese slowdown does not scare pundits more is that they expect China to repeat its past actions by loosening its monetary policy and stimulating its economy as it did in 2009
China is slowing. Its (gross domestic product) GDP growth rate has fallen to 8.1%. Not to worry. Forecasters everywhere are more than confident that the Chinese can stimulate the economy if things start to get bad. This might be true if China was a normal economy, but its strengths can quickly turn into weaknesses. The reality is that they have the wolf by the ears and there might be no way out.
In its latest forecast the World Bank has cut its forecast for China from 8.4% to 8.2%. While this growth rate seems enviable, it is a 13-year low. The Bank also forecasts that the Chinese economy, after a soft landing, will bounce back by the third quarter of 2012. The recovery’s shape would be somewhere between a vigorous ‘V’ and a flat ‘L’. The World Bank also forecast in June 2008 that the US would grow at 1.1%, Europe would grow at 1.9% and China would continue its growth of 9.4%. It also predicted in 2008 that a slowdown in the US would have little effect on China. It was wrong, very, very wrong.
The World Bank’s forecast has lots of support. A recent poll of 15 economists produced a median forecast of 8.3% while the Asian Development Bank (ADB) came in a little higher at 8.5%. Like the World Bank, the ADB’s forecast has been lowered from their report in December.
But it is not just the economic boffins who are forecasting slower Chinese growth. There is evidence from the real world as well. The most telling has to do with commodities. Over the past two years commodities seemed tied to equities. This has changed recently. World stock indices rose more than 11% in the first quarter while the Reuters-Jefferies CRB commodity index stalled, up only 0.2 %. This was reflected in Morgan Stanley’s index of commodity producers whose shares lagged behind other sectors and gained only 4%. The sluggish growth was no doubt due to falling demand from China.
Real estate construction accounts for 13% of China’s economic growth, but the sector is also slowing. Sales transactions in Beijing, Shanghai and Shenzhen are about 30% below levels last December. Investment in property construction growth was up 12% of the previous year in December, but that was half the growth in November. Developers have up to two years’ worth of supply on their books and there are an estimated 10 million to 65 million unoccupied apartments in China.
