Another cautionary word on China
Nouriel Roubini has some thoughts on China that parallel ours over the last couple of years. Note particularly the paragraph in italics. Forbes:
there is a growing risk of a hard landing in China. Let us be clear what we mean by that. In a country with the potential growth of China, a hard landing would occur if the growth rate of the economy were to slow down to 5% to 6%, as China needs a growth rate of 9% to 10% to absorb about 24 million folks joining the labor force every year–it also needs to move about 12 million to 14 million poor rural farmers every year to the modern industrial and manufacturing urban sector.
The whole social and political legitimacy of the Communist Party’s regime rests on continuing to deliver this high-growth transformation of the economy. Therefore, a slowdown of growth from 12% to 5%-6% would be the equivalent of a recession for China. And now a variety of macro indicators suggest that China is indeed headed toward a hard landing.
China’s economy is structurally dependent on exports: Net exports (or the trade-balance surplus) are close to 12% of GDP (up from 2% earlier in the decade), and exports represent about 40% of GDP. Real investment in China is about 45% of GDP, and, aside from housing and infrastructure spending, about half of this capital expenditure goes toward the production of new capital goods that produce more exportable goods. So, with the sum of exports and investment representing about 80% of GDP, most Chinese aggregate demand depends on its ability to sustain an export-based economic growth.
The trouble, however, is that the main outlet of Chinese exports–the U.S. consumer–is collapsing for the first time in two decades. Chinese exports to the U.S. were growing at an annualized rate of over 20% a year ago. The most recent bilateral trade data from the U.S. show that this export growth has now fallen to 0%.
The worst is still to come in the next few quarters. After an OK second quarter in the U.S. (boosted by the tax rebates), U.S. retailers hoped that the consumer downturn would be minor; they thus placed, over the summer, massive orders for Chinese (and other imported) goods for Q3 and Q4. But now the U.S. holiday season clearly looks to be the worst in decades, and the result will be a huge overhang of unsold Chinese goods. You can therefore expect orders of Chinese goods for Q1 of 2009 and the rest of 2009 to be down drastically, dragging Chinese exports to the U.S. into sharply negative territory…
you can expect a severe drop in capital expenditure in China, as there is already a large excess capacity of exportable goods given the massive overinvestment of the last few years. A sharp fall in net exports and real investment will likely trigger a hard landing in China. Considering the certainty of a recession in advanced economies and the likelihood of a global recession, there is a very high probability that Chinese growth could slow down to 7% or even lower in 2009…
A few years ago it was said that China was 70% dependent on exports for its growth. Roubini asserts that China is 80% dependent on exports and investment spending, much of which is related to exports. These will likely not hold up, contrary opinions notwithstanding. Thus 2009 might be pretty bad for China economically — the political implications remain to be seen.