Is China's Economy Crumbling?

On Saturday, Bloomberg reported that a joint forecast by Xiamen University and the National University of Singapore predicts Chinese economic growth will slow to 8.6 percent this year, down from 2011’s 9.2 percent announced last month by Beijing’s National Bureau of Statistics. Growth will bottom out in the second quarter of this year at 8.4 percent, according to the Xiamen-Singapore study, which is in line with consensus views.

Everyone believes that China’s growth is on the downswing. Government researchers told Reuters that next month Beijing will announce a growth target of 7.5 percent for the year. That’s down from the long-held 8.0 percent goal. 

What’s wrong with all these predictions? For one thing, they assume there will be growth this year. At the moment, the economy, according to other official year-to-year data, looks like it may be contracting.

Electricity consumption, the best indicator of Chinese economic activity, declined 7.5 percent last month. China’s aggregate financing, perhaps the second best signal, collapsed, falling by almost half. New lending in January was the lowest in five years.

Bellwether car sales? They tumbled 23.8 percent. Property prices were off for the fifth-straight month, and foreign direct investment fell for the third month in a row. Exports and imports were both down. Especially depressing was the plunge in imports destined for China’s consumers, a sure sign of a deteriorating economy. Industrial orders were contracting too, according to the closely watched HSBC Purchasing Managers’ Index.

There were some indicators showing expansion, but on balance it appears the Chinese economy got smaller last month. There were four fewer work days in January this year, compared to a year earlier, due to the Lunar New Year holiday, but that does not begin to explain these numbers, which were much worse than expected. 

The slowdown makes Beijing vulnerable to pressure from the United States. Why? Because the fastest way for China to stimulate growth is to attract fresh funds from the outside, specifically export earnings and new investment.

First, let’s look at exports. Last year, an astounding 190.5 percent of China’s overall trade surplus related to sales to the American market, an increase from 149.2 percent in 2010, 115.7 percent in 2009, and 90.1 percent in 2008.

Think the 190.5 figure can’t go higher? Perhaps it can. The number increased in 2011 because in the third and fourth quarters of the year orders from Europe to Chinese factories fell sharply. This year, European orders will be down throughout the full year, not just half it. That will be difficult for China, because the 27-nation European Union has in recent years been China’s largest export market.

Moreover, the problems in Europe have had another effect. Last month, investment from Europe into China fell 42.5 percent while investment from America was up 29.0 percent. And while European investment will fall for at least the first half of this year, dollars from America will continue to flow into the Chinese economy, as a survey from the American Chamber of Commerce in Shanghai, released this month, indicates.

And what do all these numbers mean? For one thing, China’s economy is becoming even more dependent on the US, which could be a major factor the next time Washington wants something from Beijing—on trade, Syria, Iran, or anything else for that matter. Americans should realize that power appears to be shifting back to their side of the Pacific—rapidly.


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