This story appears in the May 7, 2012 edition of Forbes magazine.
My Feb. 28, 2011 column predicted that in China “a hard landing is likely” and “a recession in Europe is inevitable.” Both are unfolding.
China just reported its slowest quarter of GDP growth since 2009, with the economy growing at an 8.1% annualized clip from January through March of 2012, down from 8.9% in the final three months of 2011. Growth has been slipping steadily from the 11.9% pace in the first quarter of 2010, and Beijing seems unable to stop the slide at this stage of the game.
China’s response to the Great Recession was massive fiscal stimulus that amounted to more than 12% of GDP, twice the relative size of the U.S. package. Shock therapy worked last time around for China, nearly doubling GDP?growth within a year, but it came with strong inflationary side effects. Food prices rose by double-digit percentages, stinging Chinese who live on subsistence incomes. Stocks stunk, Chinese savers couldn’t invest abroad, and banks paid negative deposit rates.
Housing boomed, since alternative investments were few, but prices rose beyond the reach of many would-be buyers. So the government tightened property financing.
They got what they wanted: House prices fell for the fifth consecutive month in February. Don’t look for a turnaround. Premier Wen Jiabao said in March that house prices “are still a long way from an appropriate level.”
Meanwhile, China’s central bank hiked bank reserve requirements from 15.5% in early 2010 to 21.5% last year. That’s a caveman tactic and amounts to credit allocation. The People’s Bank raised rates only 1.25 percentage points to keep cheap loans flowing to inefficient state-owned enterprises that employ around a quarter of Chinese and produce 45% of GDP.
What chance does the nonindependent Chinese central bank have in effecting a soft landing when the independent U.S. Fed, with all its sophisticated tools, tried 12 times in the post-World War II era to cool the economy and avoided a recession only once, in the mid-1990s?
Manufacturing is already in contraction, along with retail sales. Exports dominate consumer spending, which is a tiny 34% of GDP. In Brazil it’s 58%, 60% in India, 58% in Germany and 71% in the U.S.
Falling prices for industrial commodities like copper and iron ore suggest a more moderate Chinese appetite for raw materials. That hurts China’s suppliers like Australia and Brazil and their currencies. (Full disclosure: Portfolios I manage are short Chinese stocks and the Australian dollar.)
Europe is a disaster. Bailouts have no terminus, and another Greek rescue is coming. The second bailout gave bondholders €31.50 in new securities for each €100 in old, but the market prices the new paper at 25% of face value.
http://www.forbes.com/sites/investor/2012/04/19/beware-a-chinese-recession-is-coming/
China will be lucky if its just a mild recession. They are building like crazy to continue GDP growth but they’re building empty cities. There is a great video about it on youtube. They’re also polluting their country creating an ecological nightmare. There’s so many towns that have huge jumps in cancer rates that they’re known as cancer villages. Of course they also artificially weaken their currency as well. On top of this they have an aging population and do not have the population growth to support them. China doesn’t just have a bubble. They have a bubble on a bubble on a bubble.
