Is the Chinese Economy Contracting?

FORBE’S         Gordon G. Chang

The author is a Forbes contributor. The opinions expressed are those of the writer.

Year-to-year comparisons tell us the Chinese economy is growing in high single digits, but month-to-month numbers suggest it flatlined this summer.  Now, there is evidence indicating it is even starting to contract.

The National Bureau of Statistics estimated that gross domestic product increased by 9.5% in the second quarter this year, down from 9.7% in Q1.  Yet GDP is not the most reliable indicator of economic activity in China.  The official Q2 number was substantially above analysts’ estimates, indicating once again that the statistic is “man-made”—manipulated for political purposes—in the memorable words of Vice Premier Li Keqiang.

The most reliable indicator is undoubtedly electricity consumption.  In August, consumption of electricity was up 9.1% from the same month last year but down 0.1% from the preceding month.

The decline in August electricity consumption mirrors other figures.  August industrial value-added output, for instance, was off 0.5% from July.  Oil demand was down in August as were export orders.

The HSBC China Flash Purchasing Managers’ Index shows that manufacturing activity is slowing this month.  If confirmed in the final index, September will be the third-straight month of contraction.  Last month, the final HSBC index came in at 49.9, indicating a slight fall-off in activity.

To put this in context, this is the Christmas season in China.  Factories should be going at full tilt, and container ships are normally loaded to the gills.  But container lines are not overloaded this month.  Maersk, the world’s largest container-shipping company, reports its vessels on the Asia-to-Europe and Pacific routes are 90% full when they should be almost 100%.

Air cargo is also down.  Rates for air freight from Hong Kong to Europe this month are only 75% of what they were in pre-season June, indicating falling orders in China’s export belt in Guangdong province.  Carriers, even with the lower rates, are still having difficulty filling space.  Airlines are grounding cargo planes as a result.  In August, Hactl, which handles about 80% of air cargo from Hong Kong, posted its fourth consecutive month of decline in volume.  On Thursday, FedEx Corp, citing falling deliveries from China, lowered earnings estimates.

The Grinch is not only stealing Christmas, he’s plundering the rest of the Chinese economy too.  Last week, mining company shares, especially those of BHP Billiton and Rio Tinto, took big hits on forecasts of decreasing Chinese demand.  Cement prices in China are off, and shipbuilding orders have collapsed, down 30% year-on-year for the first seven months.  Some Chinese yards have yet to receive their first order this year.  Inventories are also up.

Analysts think strong consumer demand will pick up the slack, but shoppers may not save the economy.  Bellwether car sales are, in fact, flat.  In August, they were up 0.5% from July.  In July, they had plunged 11.2%.

And inflation?  The rate of inflation may have turned a corner in August, falling to 6.2% from July’s 6.5%.  The real rate is perhaps twice the official number, but the dip could be a reflection of slowing demand and the beginning of a trend.

CLSA’s Andy Rothman says there is still strong growth in China, but it’s hard to see where.  Of course, Beijing can go back to buying growth by pouring more money into the economy, as it did beginning in November 2008, but that tactic would not be efficient.  It now takes seven yuan of spending to create one yuan of output.

Moreover, increased government spending would only aggravate inflation and worsen the already-serious bad-loan problem plaguing the banks, which have lent to build “ghost cities” and other unviable projects.  And the unbalanced Chinese economy would end up even more out of kilter.

Everyone says Greece needs to face the music.  They’re right—and so does China.  Chinese government stimulus can delay the onset of symptoms, but that will only make problems worse in the long run.

In the meantime, this summer looks like it marks a turning point.  At this moment, the Chinese economy is starting to contract.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: