Friday, June 1, 2012

Early Sign: China Slowdown Threatens the Global Market

Many European countries are struggling with their huge debts crisis which lead the problems in improving their economy and creating jobs for the people. As we are facing with the global financial crisis, most of the countries begin to collect less tax revenue due to poor companies' profit performance as well as more people become jobless which leads to higher unemployment rate. This eventually leads a typical country to increase taxes or decrease basic benefits, like education, medical etc. in order to manage the country's spending expenses. Thus, we begin to see the rising of the cost of living which will lead up to uncontrollable inflation and causes a huge poverty gap between wealthy, average and poor people.

During the economic turmoil in Europe and the U.S., this strong impact crisis affects the China's economic growth as well. China depends on the manufacturing supplies from the local economy and overseas export businesses from Europe and the U.S. When consumers begin to reduce their unnecessarily spending and focus more on saving during the downturn economy, the manufacturers begin to see this sign as a slowdown in consumerism in terms of supply and demand market. China is not the only country, suffers by the ripple effect from the global economic downturn, but there are many other Asia countries being affected by this crisis as well. India is currently facing its slowdown economy, the depreciation of Rupee currency and the rising of inflation rate in the country. Even, Australia is also facing its slowdown economic growth due to low export business mainly from China market.

Some financial analysts speculate that China is heading to bubble economy  but the China government has announced that China does not need another fiscal stimulus plan at this moment, to stabilize growth and calm investors fretting that the global economy may slip back into a similar crisis as 2008-2009.

Sharp Slowdown in Asia Sounds Ominous Warning

SINGAPORE--Manufacturing activity in China and across a wide swath of Asia slowed in May, heightening fears that the turmoil in Western economies is dragging down one of the few remaining engines of global growth. 

Two purchasing managers indexes for China fell in May, briefly rattling investors Friday and stoking speculation Beijing may have to respond aggressively to support growth. Indonesia posted its first trade deficit in nearly two years, and South Korea's exports, considered a bellwether for Asia, unexpectedly fell for a third straight month. 

"The green shoots of recovery that we were seeing a month or so back are wilting away," said Rob Subbaraman, chief Asia economist at Nomura Securities. "The crisis in Europe is one reason; the other one is the China slowdown. But I think less appreciated is that the height of uncertainty about the outlook has caused Asian firms and multinationals in Asia to pause in their investments, and I think that's the bigger factor right now." 

China's official PMI, based on government data, showed manufacturing continuing to grow but by the barest of margins, falling to 50.4 in May from 53.3 in April. A figure above 50 indicates expansion. An index produced by HSBC and Markit showed Chinese manufacturing was worse, falling to 48.4 in May from 49.3 a month earlier. 

"We feel that in China a very powerful stimulus"—combining fiscal outlays and cuts to banks' reserve requirement ratio—"is required to arrest the slowdown in growth," said Frederic Neumann, co-head of Asian economic research for HSBC. "These numbers today suggest this is coming sooner rather than later. If that stimulus is not delivered, then China is indeed looking at a hard landing." 

The data comes as Europe's spiraling debt crisis and the sluggish U.S. recovery are washing up on Asian shores in the form of weaker demand for exports and capital flight from risk. Asian currencies such as the Indian rupee and Indonesian rupiah have plunged in recent weeks, prompting the authorities to intervene almost daily to support them and to take steps encouraging investors to stay put.

Most of Asia's stock markets, which began the day weaker on global concerns about Europe, slipped further on the weak data. Japan's Nikkei Stock Average dropped 1.2% to its worst close since January, while Taiwan sank 2.7%. Trading was cautious as the weekend approached and with European PMIs and U.S. nonfarm payroll data still on tap. 

Asian currencies also extended their declines, with traders saying Bank Indonesia again intervened to defend the rupiah. 

The stark exception in Asia, the yen, has served as a safe haven for risk-averse investors, boosting the Japanese currency to three-month highs against the dollar and undermining vital exporters. Japanese government officials ratcheted up their rhetoric, vowing "decisive" action against "excessive" yen moves—thinly veiled threats to intervene to weaken the yen for the first time since early November. 

China's dour manufacturing readings were mirrored across the Asia-Pacific region. A PMI for Australia fell deep into contractionary territory, down 1.5 points in May to 42.4, while HSBC's inaugural PMI for Indonesia fell to 48.1 in May from 50.5. 

Indexes in Korea and Taiwan both showed growth slowing but remained barely positive, with South Korea's HSBC PMI falling to 51.0 from 51.9 and Taiwan's to 50.5 from 51.2. India's PMI held up better, ticking down to 54.8 from 54.9. 

Ominously, the slowdown in China doesn't appear to have spread fully to other Asian countries—yet. Partly, HSBC's Mr. Neumann said, it's because other Asian countries didn't tighten policy last year as sharply as China, which feared overheating and runaway inflation. But there also may simply be a time lag. 

"Everybody had always looked to China as the pillar of Asian growth, but it turns out that in the current environment these smaller economies are actually holding up better," he said. But, "if China continues to slow, ultimately the weakness will spread to the rest of Asia." 

Other data filled out the gloomy picture. Korea's exports fell 0.4% on-year in May, undershooting expectations, with shipments to Europe and the U.S. plunging. That was a shock for an economy that depends on exports and was a surprise for the market, which had expected a 0.7% gain. 

Indonesia, where a large domestic market provides some protection from global ructions, also saw its exports plunge. They fell 3.46% on year in April and 7.36% on month for a trade deficit of $640 million, the first since July 2010. 

One bright spot was inflation, which has remained benign as growth slows. Inflation in Indonesia eased slightly to 4.45% on year in May from April's 4.5%. Consumer prices in Korea rose 2.5%, well within the central bank's comfort zone. 


China Slowdown Ripples Through Hong Kong as Sales Weaken

China’s economic slowdown is rippling through Hong Kong, with the city’s retail sales rising at the slowest pace since 2009 as shoppers visiting from the mainland trimmed their spending. 

Sales climbed 11.4 percent in April from a year earlier, the government said in a statement on its website yesterday. That’s the smallest annual gain since October 2009, excluding January and February numbers distorted by the Lunar New Year holiday. The median estimate in a Bloomberg News survey of economists was for a 16.4 percent increase.

China Slowdown Ripples Through Hong Kong as Retail Sales Weaken

China Slowdown Ripples Through Hong Kong as Retail Sales Weaken
Hong Kong's central business district is illuminated at night in Hong Kong, China. Photographer: Scott Eells/Bloomberg 

China’s economy is cooling as Premier Wen Jiabao extends a crackdown on speculation in the housing market and Europe’s sovereign-debt crisis caps exports. In Hong Kong, declines in the benchmark Hang Seng Index since the end of February have damped confidence and demand as households see the value of their assets dwindle. 

“Less extravagant spending by mainland shoppers is part of the issue,” said Donna Kwok, a Hong Kong-based economist at HSBC Holdings Plc. (HSBA) “Local households are also being more prudent because of increasing turbulence in financial markets.” 

The smaller-than-estimated gain in retail sales came the same day as jewelry maker and retailer Graff Diamonds Corp. (1306)shelved a $1 billion initial public offering in Hong Kong, blaming “consistently declining stock markets.”

Graff Pulled

Graff marketed its IPO amid a slowdown in luxury-goods spending in Hong Kong, where Chinese tourists splurge to take advantage of lower tax rates than in the country’s mainland. Sales of jewelry, watches and valuable gifts in Hong Kong rose an average of 17 percent in the first three months of the year compared with a year earlier, according to data compiled by Bloomberg. That’s down from growth of about 37 percent in the last quarter of 2011, the data show. 

Hong Kong billionaire Cheng Yu Tung’s worth has dropped 22 percent this year to $15.6 billion, according to data compiled by Bloomberg, as Chow Tai Fook Jewellery Co. dropped 35 percent in Hong Kong trading. Cheng’s Chow Tai Fook Holding Ltd. owns 89 percent of the East Asian regional jewelry retailer, according to the data. 

Hong Kong’s benchmark Hang Seng Index (HSI) fell 0.3 percent yesterday. 


Understanding the China Slowdown

Understanding the China Slowdown

By Dexter Roberts on May 31, 2012 Source: Bloomberg Businessweek

A sure sign of Chinese concern about their economy is the flurry of announcements about growth. China must give “more priority to maintaining growth,” Premier Wen Jiabao said on May 20. “Key infrastructure projects” will be sped up, the State Council announced on May 23. “China is making all-out efforts to encourage private investment,” reported the official Xinhua News Agency on May 28. 

More stimulus for China? The last program was launched just over three years ago. “Until recently, most officials felt there was no need to do more than push down gently on the accelerator,” wrote Mark Williams, chief Asia economist at consultants Capital Economics in a May 24 note. No longer. The economy expanded 8.1 percent in the first quarter.

Credit Suisse (CS) now expects China to grow at 7 percent or less this quarter. If Greece quits the euro and China fails to deliver on stimulus, the mainland’s growth could slow to 6.4 percent this year, warned local investment bank China International Capital on May 23.

The latest stimulus could cost 2 trillion yuan ($315 billion), estimates Credit Suisse. A plan to subsidize consumer purchases of energy-efficient appliances will soon kick in, and the planning agency has approved the expansion of airport projects in the provinces of Xinjiang, Chongqing, and Sichuan.

The Chinese seem aware that the last spending spree resulted in overbuilding. “The efforts for stabilizing growth will not repeat the old ways of three years ago,” Xinhua reported on May 29.

Some economists are skeptical. “There is already massive overcapacity. But they are saying everything is going to be fine,” says Patrick Chovanec, a business professor at Tsinghua University. “That’s because the government is going to spend lots of money. Think of the moral hazard there.”

The bottom line: The Chinese government is planning up to $315 billion in stimulus spending to offset soft exports and a sagging domestic economy.

China stimulus unnecessary, risks long-term damage

An employee inspects the interior of a newly-made tyre with a flashlight at a tyre factory in Hangzhou, Zhejiang province May 29, 2012. REUTERS/Lang Lang

BEIJING | Wed May 30, 2012 8:08am EDT  SOurce: Reuters
(Reuters) - China does not need massive fiscal stimulus to stabilize growth and calm investors fretting that the global economy may slip back into a similar crisis as 2008-2009, top policy advisers said on Wednesday.

Even though China's economic growth is expected to ease this year to its weakest pace in 13 years, aggressive spending now could do longer-term harm, they said.

"I don't think we're back in that kind of acute crisis phase," Richard Boucher, deputy secretary general of the Paris-based Organisation for Economic Co-operation and Development (OECD), told Reuters.

Boucher's is the latest voice to play down the need for a massive stimulus program of the sort unleashed by Beijing at the height of the global economic crisis.

Investors have speculated wildly this week about potential stimulus from China, looking to the biggest driver of global growth as Europe's deepening debt crisis erodes market confidence in the health of the world economy.

Many traders now see parallels to the 2008-09 crisis - when the world's banks lost trust in each other, the international financial system nearly came undone and global trade ground to a halt - especially as more evidence emerges of the slowdown in China's economy.

The crisis saw Beijing unveil a 4 trillion yuan ($635 billion) stimulus program to fight a downturn that cost 20 million Chinese jobs in a matter of months. The stimulus helped underpin investor faith in the international policy response to solve the crisis.

Expectations of fresh Chinese stimulus have been fuelled by government steps in the past two weeks to fast track some infrastructure and industrial projects, which economists estimate to be worth around 1 trillion yuan.
Premier Wen Jiabao was quoted on a government website on May 23 saying that "downward economic pressure is increasing."

Boucher - deputy head of the organisation that bills itself as the global policy think-tank to the world's most important economies and in Beijing for a conference on international trade - said China had ample policy tools at its disposal without resorting to fiscal stimulus.

"It is not just a question of money," Boucher said. "The Chinese authorities have a whole variety of tools to use to stabilize the right level of growth... I think signs that Chinese growth is stabilizing at a steadier level, a more sustainable level, would be good for everybody."

Vice Premier Li Keqiang said on Wednesday that China should rely on domestic demand and structural reforms to support the economy, which faces growing downward pressures.

"We must stick to the long-term strategy of stimulating domestic demand in order to maintain stable and relatively fast economic growth. It is also an important step to reform our economic structure," state radio cited Li, widely seen as China's premier-in-waiting, as saying.

China's leaders have repeatedly said they would use a period of anticipated slower growth in 2012 to carry out structural shifts, including efforts to wean the economy off dependence on external demand and investment spending.

Beijing in March lowered the country's official growth target to 7.5 percent for this year from 8 percent previously. It has a target of 7 percent on average over the five years to 2015. The most recent Reuters poll produced a consensus forecast for 2012 growth of 8.2 percent.

Such growth is way above an ill-defined "hard landing" scenario that investors had largely dismissed by the end of March, but which has begun to creep back into the consciousness of markets after weaker-than-expected April data.

China's annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009.
But slowing growth alone does not imply a hard landing, said Xia Bin, head of the financial research institute at the cabinet's think-tank, the Development Research Centre.

Xia, who was a member of the central bank's monetary policy committee until March, said a hard landing would bring a sharp rise in both banking sector risks and unemployment, posing a threat to social stability.

In contrast to the global financial crisis, China's labor today is tight as firms struggle to fill vacancies. Non-performing bank loans are around 1.1 percent - far below international averages.

Meanwhile there is room for the central bank to cut lending rates to help deal with the risks to growth and corporate profits but excessive policy action should be avoided, Xia said.

"Americans and Europeans like it. Investors like it because they want to speculate on stocks. The whole world is hoping China will relax policy," Xia told Reuters.

"We will fall into a trap if we do. We will not be that stupid," Xia said, adding that the government should only stimulate economic growth in a "balanced and modest" way, while forging ahead with structural reforms to sustain growth over the longer term.

With that in mind, China's cabinet on Wednesday approved a blueprint to promote seven strategic industries by 2015, including next-generation information technology, biotech, industrial materials and advanced equipment manufacturing.

China's 2009-10 stimulus program sparked a wave of speculative real estate development, lifting home prices way out of reach of many middle class Chinese. It drove inflation to a three-year high and saw local governments build a 10.7 trillion yuan mountain of debt.

Beijing has only just brought inflation under control, helping explain why growth is being sacrificed short term. Analysts cite a two-year long program of property curbs as the main reason why China's economic growth in 2012 will be the slowest since 1999.

Boucher and Xia echoed a chorus of commentary from top Chinese academics in leading state-backed newspapers on Wednesday that Beijing should spur growth, but shun stimulus.

Earlier this week, an official at China's top economic planning agency, the National Development and Reform Commission (NDRC), said large-scale economic stimulus was unlikely.

An article published on the website of the official Xinhua news agency said China had no plan to repeat the powerful stimulus measures used during the global crisis in 2008.

"The Chinese government's intention is very obvious: It will not unveil another massive stimulus plan to stimulate economic growth," the Xinhua article said, without citing sources. "Current policies to stabilize growth will not repeat the old way of stimulating growth three years ago."

It was not clear if the article, which also cited analysts, represents official thinking - Beijing usually publishes straight-forward commentaries, not analyses, when it wants to explain its stance.

But the story was in line with the mainstream view among Chinese policy advisers that Beijing should avoid massive stimulus that would reduce the efficiency of economic growth and exacerbate overcapacity in some industries.

Chen Bingcai, a professor at the National Academy of Governance, said China must not overly expand investment and sacrifice quality growth for high growth. Chen's school teaches and trains many senior leaders of the central government.

"If Beijing returns to an investment boom again, the previous call of adjusting the economic structure would turn out to be nothing but empty talk," the official China Securities Journal cited Chen as saying.

(Additional reporting by Aileen Wang and Langi Chiang; Editing by Neil Fullick)

China slowdown threatens US factory revival

By John W. Schoen, Senior Producer  May 30, 2012 Source: MSNBC

Carlos Barria / Reuters
A laborer works at a shipyard in Yueqing City, Zhejiang province in this March 27, 2012 file photo.
An emerging renaissance in American manufacturing is staring at the oncoming threat of a global economic slowdown.

After investing hundreds of thousands of dollars in high tech equipment last year, Drew Greenblatt’s manufacturing business is beginning to see a return on that investment. Business was up 20 percent in 2011 at Marlin Steel, which makes wire baskets for industrial customers.

Exports are helping a lot. Greenblatt’s company just shipped to China a $20,000 order made at his Baltimore, Md., factory with steel supplied by a mill in Illinois.

Low wages and low-cost manufacturing used to make Chinese markets tough for U.S. manufacturers to break into. Today, rising wages in China are giving American companies second thoughts about moving their manufacturing jobs to China, Greenblatt said.

“All of a sudden, if your math says, ‘I’ve got to pay the guy $7.50 an hour in Shanghai or I can hire a guy for $12 a hour in Canton, Ohio,’ why would I do it in Shanghai?” said Greenblatt. “I’ve got intellectual property issues over there, there’s no rule of law, there’s a lot of corruption.  Plus if I make it here, I get the stuff six weeks faster: there’s no freight. So a lot of the reasons to push jobs overseas are starting to fall apart.”

Other companies are doing the same math. A report in March by the Boston Consulting Group found seven industry groups, selling about $200 billion in Chinese-made imports, that will likely shift production back to the U.S. to duck rising costs in China. That could add between $20 billion to $55 billion to U.S. gross domestic product before the end of the decade, the authors estimated.

U.S. export gains in Chinese and other global markets will create between two million and three million American jobs, lower the U.S. unemployment rate by between 1.5 to 2.0 percentage points and cut the U.S. merchandise trade deficit by 25 to 35 percent, according to the study.

Demand for Chinese exports, meanwhile, is being hurt by the ongoing recession in Europe, China’s largest trading partner. The hit to China’s exports so far has been relatively mild compared to the sharp downturn that followed the financial panic of 2008, according to Carl Weinberg, chief economist at High Frequency Economics. Lost exports amount to about $300 billion - about half the losses from the 2008 downturn – and the Chinese economy is better able to weather the loss because its large and its currency is stronger than in 2008, he said. But he figures the drop in exports hasn’t run its course and could get a lot worse.

The slowdown in China is also starting to take a bite out of the economies of smaller, emerging economies and trading partners that supply the raw materials needed to feed China’s export machine.

“Asia should be very worried if the European situation continues to unravel," said Rob Subbaraman, chief Asia economist, at Nomura Group.  “It can handle moderate growth in Europe or the U.S. But if we start to move toward a deep recession there’s a tipping point where Asia gets hit very hard again.”

To be sure, China’s economy is still growing at a pace that would feel like wild prosperity in larger developed economies like the U.S. or Europe. But as the last major engine of growth, some forecasters are cautioning that the loss of Chinese demand threatens to spark a wider global slowdown that will crimp demand for U.S.-made products.

U.S. manufacturers are “about to face a negative shock from the hit to exports from the deepening European downturn and the spreading impact on demand in other key trading partners in Asia,” said David Rosenberg, chief economist at Gluskin Sheff.

One big unknown is whether Chinese consumers will pick up the slack from the lost growth in exports. China continues to pursue an ambitious, 30-year plan to transform itself from a rural agrarian society to an urbanized manufacturing and consumer-driven economy. The ongoing flood of workers from farms to factories -- the largest peace-time migration in human history -- will continue to drive demand for new housing, cars and other consumer products.

But in the short-run, consumer spending isn’t kicking in fast enough. Retail sales, adjusted for inflation, are slowing. As the government continues to invest heavily in public products and state-owned businesses, consumer spending makes up a smaller portion of the economy than it did five years ago. More than 50 percent of the Chinese economy still relies on some form of government spending: consumers account for roughly a third of GDP – about half the level in the U.S.

To revive growth, China’s leaders are expected to continue heavy government investment. After years of trade surpluses with the rest of the world, the government has plenty of cash to invest. But the risk now is that the government is creating a massive infrastructure and real estate bubble.

“They have been overbuilding everything to create jobs for these rural migrants,” said Harry Dent, an author and economic forecaster. “They have 20 to 30 percent more capacity built in their main industries –- cement, aluminum, steel, on and on. They just build stuff to create jobs  and to keep people happy. And they’ve been doing this for over a decade.”

China’s central bankers also face a difficult choice in trying to stimulate growth. The usual path of lowering interest rates could add heat to a real estate market that has already reached bubble levels in many urban areas. China’s bankers are also coping with a pile of bad loans to failing state-owned companies after an earlier round of easy credit aimed at heading off the 2008 recession.

That means easier credit may not produce the economic stimulus China’s leaders are hoping for.

“The positive, long-run outlook doesn’t give firms an incentive to invest today if China largely has all the apartments and car production lines it needs for the next couple of years,” said Mark Williams, chief Asia economist at Capital Economics.

It remains to be seen how badly U.S. manufacturers would be hurt by a wider, deeper coordinated global slowdown. Once recessions spread around the world, they become more difficult to reverse.

Greenblatt is upbeat. He sees an opportunity in export markets as competitors pull back. He also thinks the U.S. is somewhat insulated from a trade shock. Only about 10 percent of U.S. GDP comes from exports compared to the economies of China or Germany, where nearly a third of total output relies on exports.

Discussing whether China's economy could be on the brink of collapse, with Gordon Chang, Forbes columnist, and Peter Navarro, UC-Irvine business professor.
“Most American factories don’t even consider exporting -- it doesn’t even cross their mind,” he said. “Because it’s easier sell to Denver and Duluth than it is to Denmark.”

But Dent argues that the wider cause of the global economic slowdown -- a historic shift in demographics -- will continue to weigh on global growth for another decade or so no matter how hard governments try to spur more growth.

Most developed countries are seeing their Baby Boom population peak, which slows consumer spending and adds to the cost of government-funded social programs.  That means global growth won’t revive to historic levels for another decade, until the next generation of Millennials reaches its own peak spending years, said Dent.

“Were all slowing down,” he said. “And China does not have good demographics going forward. They only have this export machine and urbanization and they’ve overdone both.”


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