The China Slowdown

One of the interesting things in life is to read "news" sources knowing that they are talking about things that have already happened. Monday's USA Today had an article warning about a possible slowdown in China. The article quotes Premier Wen Jiabao as saying there is "huge pressure" on China despite stimulus measures. The premier and the article went on to discuss the potential for a further slowdown even though the economy is currently stable.

Several thoughts come to mind. First, what are they talking about? China's economy has been slowing down for the last three quarters. I immodestly add that we had forecast just such an event. China's GDP is in Phase C, Slower Growth, and has been since September 2011. GDP is still reportedly an impressive 17.7% higher than this time last year, but the growth rate is slipping. The China Leading Indicator and the slowdown in exports in general signal further slowing in China’s rate of growth.

China's Industrial Production Index is also slowing down. Production is 12.4% higher than last year on an annual moving average basis, but the trend is undeniably toward slower growth. Higher average annual wages for manufacturing, (at 36,665 RMB, they are 18.6% higher than last year), rolling blackouts, escalating energy costs, and higher transportation costs are also hurting China. Readers exporting from China should continue to expect higher costs. Readers selling into China should expect smaller and/or less frequent orders.

Exports to the U.S. from China stand at $341.5 billion, up 13.1% from last year. The annual year-over-year comparison is rising (Phase B) as the U.S. consumes Chinese products. Exports from China to the EU are slightly larger at $355.0 billion, but the annual growth rate is decidedly smaller at 6.9%. The last quarter actually went negative; Europe is having a negative impact on China. So is Brazil. Exports to Brazil are showing an annual growth rate of 27.5%. That is still very impressive, but the trend is heading lower, signaling a slower growth rate in the exports when measured in dollars.

The export figures bring up the second China observation. Where is their middle class? Thirty years of economic growth in what is now the world’s second largest economy has failed to produce a middle class that can carry the economic load without export and stimulus props.

The third observation is in the area of stimulus spending. China has spent a lot of money on stimulus measures, and they have done it without borrowing. China spent about 4 trillion RMB in 2008 to prop up the economy, and they appear ready to spend another 2 trillion RMB now on various projects from railroads and social housing projects to the environment and infrastructure spending.

My thought is simple: if stimulus spending in the panacea for what ails an economy, why is another round necessary? Europe's problems have certainly not helped China, but as stated above, exports to the EU have been above year-ago levels until recently. The export situation to the U.S. is improving, but China still needs more stimulus spending. The implication is that stimulus spending per se is not a cure-all, and even China cannot simply spend its way out of its economic problems.