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.

Emerging economies to be the biggest players

Consultancy firm, PricewaterhouseCoopers, announced on Friday that within the next five years it expects emerging economies (led by China and India) to have a higher proportion of global output than western economies. A global recession will trigger a dramatic shift in the economic balance of power to the emerging world that could see the west lose the dominance it has enjoyed since the dawning of the industrial age. While the US would remain the world's biggest economy, China would overtake the eurozone and become the second largest. Between them the four so-called Brics (Brazil, Russia, India and China) would alone account for 26.5% of global GDP.

Full article, The Guardian, 01 November 2008

Russian economy under pressure

An interesting article in this morning's Financial Times examines the current state of play in the Russian economy. As one of the BRIC economies Russia could be excused for having had very positive aspirations for its continued future growth. Before the crisis hit home, Dmitry Medvedev, Russia’s President (pictured above with Prime Minister Putin), boasted in June that Russia was not part of the problem but part of the solution. Its cash-rich companies would invest abroad, Moscow would become a world financial centre, the Rouble would become a reserve currency and so on. On August 8th, their currency reserves peaked at just under $600bn - the third-largest in the world, however by this week they had fallen to $484bn. This week’s fall, $31bn, was the steepest so far. Other factors are also hitting their economy, namely:

• The Russian stock market has lost 70% of its value this year.
• The commodity prices that spearheaded its boom are now falling. Metals, energy, and food account for 80% of Russian exports. Russia is the world's second-largest oil exporter and the government’s spending plans are based on a $70 a barrel oil price, so every $1 decrease in the barrel beneath this price implies $3bn less in export revenues a year.
• Any growth in the non-energy sectors had been fuelled by loans from western banks. However the credit crunch has ensured that this easy money from the west has now fled.
• Russia has failed to diversify its economy and its politics have long made investors nervous.

Full article, Financial Times, 31 October 2008

"New Anxiety Grips Russia's Economy", New York Times, 31 October, 2008