Economics Weekly Review: 15th – 21st Dec 2008 | Hard-Landing In China? Not As Yet, But Possible

December 23, 2008 at 2:22 am Leave a comment

Hard-Landing In China? Not As Yet, But Possible

China – There is no doubt that the China economy is now undergoing a severe soft-landing. If the deteriorating economic conditions continue into the middle of 2009, we expect to see a severe hardlanding in the country. As to how the China economy will land next year, it largely depends on whether the paralysed United States economy can see light at the end of the tunnel by 2H09. The latest housing starts and building permits in the America suggest that we have yet to see a beam of the light at this point in time.

Hard-landing in China is just a possibility and it has yet to become a reality.
Nevertheless, if it turns out to be true, it would be a harsh reality. At this point in time, what is certain is that the China economy really undergoes a severe soft-landing. In other words, it slows down quite noticeably. As evidenced by the y-o-y growth of industrial production in the country, it dipped sharply from 11.4% in August 08, to 8.2% in September 08, and to 5.4% in October 08. This suggests that the exportoriented manufacturing sector in China, which accounts for almost half of the economy, has slowed to a crawl. This is in line with the fact that the y-o-y export growth of the country tumbled from 19.2% in October 08 to -2.2% in November 08.

Worryingly low as the y-o-y growth of industrial production and exports was in November 08, it does not necessarily suggest that the China economy is now undergoing hard-landing. The y-o-y growth of fixed-asset investment in China’s urban areas between January-November 08 continued to record a remarkable rate of 26.8%. It is only slightly lower than the 27.2% rise registered for the period January-October 08. On a y-o-y basis, fixed-asset investment in the country’s urban areas for November 08 alone expanded by 23.7% as compared to 24.3% in the previous month. Based on the latest y-o-y growth of fixed-asset investment and retail sales in China, hard-landing in the country is just a possibility rather than an actuality, at least for now. The retail sales for November 08 in China grew encouragingly by 20.8% from the corresponding month in 2007 (October 08: 22.0%).

As to how the China economy will land next year, it largely depends on whether the United States economy can see light at the end of the tunnel by 2H09. The latest housing starts and building permits in the America suggest that we have yet to see a beam of the light at this point in time. The housing starts in November 08 tumbled by 49.8% from the corresponding month in 2007. Meanwhile, the building permits in November 08 shrank dreadfully by 48.1% from November 07. So long as the housing market in the America continues to decline, there is little hope that
the present economic slump in the country will bottom out.

While we are anxiously awaiting recovery in the United States economy in 2H09, the country is now haunted by the spectre of depression. We are glad to see that inflationary pressure in the economy has eased off, but it has happened too drastically. The Consumer Price Index of the United States in November 08 fell sharply to 1.1% from 3.7% in October 08. Depression, if it is not contained, would deepen the present recession in the country and thereby derail the economic
recovery process anticipated in the second half next year. In the event that there is still no sign of bottoming out in the United States economy by 2H09, we expect that hardlanding in China would be an actuality rather than a possibility then.

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