Economics – China Undergoes A ‘Severe’ Soft-Landing
China – As exports from China shrink dreadfully, the country can only look to its domestic-based services sector for growth over the near term. Nevertheless, a longer and deeper than expected recession in the United States may eventually send the growth of the services sector in China into a tailspin as well. If there is still no sign of bottoming out in the United States economy by 2H09, it is very likely that China would undergo a severe hard-landing and the world economy would slip into a deep recession then.
Admittedly, the export growth of China for November 08 was shockingly and depressingly low. Exports from China to the world in November 08 shrank dreadfully by 2.2% from the corresponding month in the previous year. In October 08, the y-o-y export growth of China recorded a remarkable rate of 19.2%. Given that the y-o-y import growth of China dipped sharply from 15.6% in October 08 to -17.9% in November 08, we expect exports from China to continue declining terribly over the next few months.
As exports from China shrink significantly, the country can only look to its domesticbased services sector for growth over the near term. Services account for about 40% of the China economy. Based on the y-o-y growth of retail sales in November 08, it suggests that the services sector in the country is still holding up relatively well. Retail sales in the country for November 08 expanded by 20.8% as compared to 22.0% in October 08. Be that as it may, it is clear that the growth momentum of the services sector has shown some signs of softening in recent months.
We expect that the growth of the China economy would continue to be supported by the domestic-based services sector over the near term, as the export-oriented manufacturing sector continues to slump. University of Michigan’s Consumer Sentiment Index for December 08 continues to drift at a discouragingly low level of 59.1. In November 08, it registered 55.3. This suggests that consumer spending in the United States would continue to remain sluggish at least in the near future. Given that about 15% of China’s total exports directly go to the United States, this will continue to adversely affect the manufacturing sector in the second largest economy in Asia, that is for sure. If the present recession in the United States economy turns out to be deeper and longer than expected, we may eventually see the growth of the services sector to be sent into a tailspin as well. All this will lead to a severe hard-landing in China and thus a deep recession in the world economy.
Besides a possible hard-landing in the China economy, the other risk faced by the country is depression. While we are glad that inflationary pressure in the country has eased off, the fact that it has happened too drastically raises concern that the China economy may be heading towards a state of depression next year, especially in the wake of a substantial slowdown in the world economy. The Consumer Price Index of China dipped sharply from 4.0% in October 08 to 2.4% in November 08, while the Producer Price Index of the country fell significantly from 6.6% to 2.0% during the period . Nevertheless, it is premature to ring the depression warning bell, as the two price indices still stay at a positive territory.
All things considered, we estimate that the y-o-y real GDP growth of China for 4Q08 to slow to about 7.5-8.0% from 9.0% in 3Q08. In other words, we are expecting a y-o-y real GDP growth rate of around 9.3-9.4% for China in 2008. The International Monetary Fund expects the China economy to expand at a y-o-y rate of 9.7% this year.
Entry filed under: Business, Finance, Stock Market. Tags: Asia, china, Consumer Price Index of China, Economics, exports, International Monetary Fund, Producer Price Index, Soft-Landing, united states, University of Michigan’s Consumer Sentiment Index.