The slowdown in China

We’re now seeing evidence that China isn’t immune to the financial crisis after all. Its economy is clearly slowing down. Very few economists expect China to go into recession and while the forecast that the economy will expand by 5.8% in the fourth quarter this year might make western economies envious, it is down from about 11% in 2007. Just as its growth astounded much of the world, it now appears to be slowing more quickly than anyone expected.

The Chinese boom was built on three components, namely exports, investment and consumption. All three have slowed down. Construction projects are being suspended, consumer confidence is declining and many factories in southern China are closing, putting tens of thousands of migrant laborers out of work. Car sales in China have plummeted this year, air travel is in decline, property sales have dried up, and this weakness in the property market is hitting the makers of steel, cement and glass. It's also not helping that China’s stock markets have also collapsed, after a stunning rise in 2006 and 2007. Share prices in Hong Kong are down about 50%, and Shanghai 67% this year — wiping out nearly all the gains it had made in the previous two years.

All of this and the threat of rising joblessness and social instability will spur the Chinese Government to address the issue. It is preparing a large economic stimulus package (fiscal and monetary policy measures), which will push new infrastructure projects, offer aid to exporters and search for ways to prop up the nation’s severely depressed stock markets and property markets. There will be more massive and aggressive announcements from the Chinese government in the months ahead. However, China also has a lot of plus points to help out. Unlike elsewhere, Chinese banks did not issue subprime loans as a rule, and the country's €1.43 trillion in hard-currency reserves will be very useful to have in a downturn. The currency is stable and there are high liquidity levels, all of which give China the most flexibility in the world to fend off the impact of the global financial crisis.

"China may be heading for a severe economic slowdown",
London Times, 08/11/2008.

"Once sizzling, China’s economy shows rapid signs of fizzling",
New York Times, 07/11/2008.
"China's stalling boom has globe worried",
Irish Times, Saturday, 25/10/2008.