China Syndrome

Discussion in 'Economics' started by 2cents, May 15, 2007.

  1. pretty compelling 2-pager from UBP fyi
  2. tsunami alert folks... there'll only be one warning and this is it...

    China Property Slump Threatens Global Economy as Growth Slows
    2008-12-02 00:08:47.430 GMT

    By Kevin Hamlin
    Dec. 2 (Bloomberg) -- House prices in Shanghai, Shenzhen and
    Guangzhou are plunging, and the global economy may grind almost
    to a halt next year because of it.
    Construction of homes, offices and factories fell at least
    16.6 percent in October after rising 32.5 percent a year earlier,
    according to Macquarie Securities Ltd. That's squeezing an
    economy already slowed by recessions in the U.S., Japan and
    Europe that have cut demand for exports. Building is the biggest
    driver of China's expansion, contributing a quarter of fixed-
    asset investment and employing 77 million people.
    The central bank cut its key interest rate by the most in 11
    years last week and the government said “forceful” measures were
    needed to arrest a faster-than-expected economic decline. Without
    more rate cuts and government spending, China is unlikely to
    contribute the 60 percent of global growth Merrill Lynch & Co.
    forecasts for next year, further slowing the world economy.
    “China is now at the heart of the global slowdown,” said Jim
    Walker, chief economist at Asianomics Ltd., an economic advisory
    firm in Hong Kong. “It means that global growth is probably going
    to be dragged down close to zero next year.”
    Walker, voted best regional economist in an Asiamoney
    magazine brokers' poll for 11 years through 2004 when he worked
    for CLSA Asia Pacific Markets, estimates China will grow zero to
    4 percent next year, with a 30 percent chance of a contraction.
    In 2005, China vaulted past the U.K. to become the world's
    fourth-largest economy, after expansion averaged 9.9 percent
    annually for the previous 30 years. GDP has increased 69-fold
    since Deng Xiaoping began free market changes in 1978. China
    accounted for 27 percent of global growth last year.

    'Close to Zero'

    The World Bank last week slashed its forecast for China's
    expansion next year to 7.5 percent, the slowest in almost two
    decades, from 9.2 percent in the previous quarterly report,
    saying the country could no longer rely on overseas consumers.
    “The real estate sector has seen a particularly pronounced
    slowdown,” said Louis Kuijs, a senior economist at the World Bank
    in Beijing. “Real estate investment growth is now close to zero.”
    China's export orders and output shrank in November by the
    most since records began as the global financial crisis sapped
    demand for the nation's toys, textiles and computers.
    Exports and property together have contributed about half of
    the expansion in China's GDP, estimates Shanghai-based Andy Xie,
    an independent analyst who was formerly Morgan Stanley's chief
    Asia economist.
    “That growth is gone,” he said. “Can the government make it
    up with something else? It's going to be tough.”

    Merrill Forecast

    Merrill's forecast of 1.5 percent global growth next year is
    based on an 8.6 percent expansion in China. The prediction on Nov.
    21 came 12 days after China announced a 4 trillion yuan ($586
    billion) stimulus plan, mostly for public works projects.
    “In order to curb an excessive economic slowdown, we must
    adopt forceful measures that have a noticeable impact,” said
    Zhang Ping, chairman of China's top economic planning agency, on
    Nov. 27. “Some economic indicators weakened further in November,
    showing a faster decline.”
    President Hu Jintao on Nov. 30 said the economic slump is a
    test of his administration's ability to govern.
    The government is trying to limit fallout from the slowdown
    for fear that rising unemployment may lead to social unrest.
    Police and security guards last week attempted to breakup
    demonstrations by fired workers who overturned a police car,
    smashed motorbikes and broke company equipment in southern
    Guangdong province, the state-run Xinhua news agency reported.

    'Massive Policy Stimulus'

    A second stimulus package to boost consumption may be
    imminent, the Beijing-based Economic Observer reported Nov. 24.
    Measures being considered include raising income-tax thresholds,
    higher salaries for state workers and increased subsidies for
    low-income groups, the newspaper said, citing people involved in
    discussion of the plan.
    China has room to spend even more than already announced
    because it has debt equal to 15.7 percent of gross domestic
    product -- compared with 75 percent in India -- a budget surplus
    and the world's largest currency reserves at $1.9 trillion, said
    Lu Ting, a Hong Kong-based economist with Merrill Lynch.
    “Investors should prepare for massive policy stimulus,” Lu
    Shanghai house prices fell 19.5 percent in the third quarter
    from the previous three months, according to real estate broker
    Savills Plc. Declines in apartment values are accelerating in
    Shenzhen and Guangzhou, two of the fastest growing cities in
    Guangdong province, which produces 30 percent of China's exports.
    Construction will contract 30 percent next year after
    expanding 9 percent in the first three quarters of 2008,
    according to Macquarie Securities.

    'Property Is the Epicenter'

    “If real estate contracts by 30 percent it doesn't matter how
    much the government spends on infrastructure, the economy is
    still going to be very weak,” said Paul Cavey, a Hong Kong-based
    economist at Macquarie who forecasts a 6.6 percent expansion next
    year. “Property is the epicenter of economic weakness.”
    Slumping demand for commodities is already reverberating
    beyond China's shores. Melbourne-based BHP Billiton Ltd. last
    week abandoned plans to buy Rio Tinto Group and create the
    world's biggest mining company, blaming a rout in commodities
    prices. China is the world's biggest metals buyer and the second-
    largest consumer of oil.
    Fortescue Metals Group Ltd., Australia's third-largest iron
    ore exporter, last week suspended work on a railroad that will
    carry the steelmaking ingredient to port. Australian mining
    companies may delay $50 billion of projects, reducing investment
    that accounts for a third of GDP, Credit Suisse Group AG said in
    a report last month.

    Commodities Slowdown

    “China is a huge source of demand for commodities, and now
    its slowdown is a key reason behind the collapse of commodity
    prices,” said Nicholas Lardy, a senior fellow at the Washington-
    based Peter G. Peterson Institute for International Economics.
    “It's experiencing the sharpest deceleration of economic growth
    since reforms started 30 years ago.”
    Steel prices in China have tumbled because of the slowdown
    in construction, which accounts for 38 percent of demand,
    according to Jing Ulrich, chairwoman of China equities at
    JPMorgan Chase & Co. Spot prices of hot-rolled sheet have plunged
    almost 40 percent since the end of June to 3,594 yuan a ton.
    Zhengzhou-based Bayannur Zijin Nonferrous Co. is reducing
    zinc output by 30 percent as demand for the metal declines, it
    said Nov. 19. Zinc, which is used as a protective coating for
    iron and steel used to build homes and make cars, has tumbled 49
    percent this year on the London Metal Exchange.

    Fallout for Neighbors

    For every 1 percentage point growth in China's economy, the
    rest of Asia will be boosted by half that, says Huang Yiping,
    chief Asia economist at Citigroup Inc. in Hong Kong.
    Countries with the most at stake are Taiwan, which shipped
    almost 36 percent of its exports to China last year; South Korea,
    25 percent; and Japan, 19 percent, according to UBS AG.
    Taiwan's export orders from China and Hong Kong dropped 23
    percent in October, the biggest decline since 2001, the
    government reported Nov. 24.
    Concern over a slowdown spurred China to cut interest rates
    by 1.89 percentage points since September and end restrictions on
    bank lending. To encourage home sales it trimmed mortgage rates,
    taxes and down-payments for first-time home buyers.
    That's a U-turn from the first half, when Central Bank
    Governor Zhou Xiaochuan was focused on fighting inflation that
    rose to a 12-year high of 8.7 percent in February. It dropped to
    4 percent in October.
    The slump in residential and commercial building may
    undermine efforts to buoy the economy.
    “The global financial crisis won't get China to zero percent
    growth and neither will recession in developed economies,” said
    Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. “If
    there's a collapse in the property market that might do the job.”