Recession Or Depression For China?

There are some who believed that Asia one day 'can' be a consuming giant.

I strongly believe against it. And I had highlighted an editorial the other day: Can China Adjust To The Lack Of Spending From US?

Here's another view from Edward Hugh of China Economy Watch who wrote the following yesterday. China Nears Recession Point As GDP Slumps

Let me highlight some issues.

• China’s National Bureau of Statistics released fourth quarter GDP growth statistics for 2008 today, and it turns out that (according to their initial estimates) the Chinese economy expanded by 6.8 per cent in the last quarter of the year when compared with the same period in 2007. This was the weakest quarterly year on year growth rate in seven years. For the year as a whole, the economy grew 9 per cent, down from the revised 13 per cent growth rate in 2007.
  
  Strikingly, Japanese exports to the US were down some 37% yoy, losing some 26pp since the 11% yoy contraction in July. But we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy, I would eat my hat if the Chinese economy was doing anything other than contracting right now. Albert Edwards Societe Generale

• At S'pore's port container terminal (the busiest in the world), a third of the cranes are idle. There are some companies saying they have inventories stretching 6 months out. December's plunge in Asian exports was due to the shutdown of electronic companies during the Christmas period because of the pile up in inventories.

• Basically it seems to me that few people other than professional macro economists and bank analysts (and far from all of these if the truth be told) really realise what the implications of such a dramatic decline in year on year GDP actually means. If the quarter on quarter rate of expansion was very low indeed, possibly verging on the negative then - guessing a bit, you know what they call back of the envelope stuff - this means output must have been moving in the October-December period somewhere in an annualised 0 to 2% range. This means we may well see quarter on quarter negative growth in 2009 in China, and that the possibility of a technical recession of two consecutive quarters of negative growth must be over 50% at this point. It wasn't so long ago that the consensus was saying that annual GDP growth which was as high as 6% would be tantamount to a recession!
  
  It is really very frustrating to find that with all the trillions of dollars at issue, and a whole army of China watchers, virtually no one seems to be trying to derive monthly and quarterly rates of movement from the official statistics.
  
  The OECD do at least seem to be aware of this problem and they do have a lead indicator for China (which includes items like cargo handled at ports, Enterprise deposits, Chemical fertilizer production, Non ferrous metal production, a Monetary aggregate M2, and Imports from Asia. Below I have a chart which compares this indicator for both Spain and China. Since Spain, as we know, is having a very strong contraction at this moment in time, it gives some sort of reference point. What is so striking is that it appears China is now slowing much more rapidly than even Spain, and GDP may, looking at the steepness of the recent month on month drops,have even started contracting in November. This is obviously all shell shock stuff.

The final passage..

• Export Slump
  
  China is an export driven economy, and you can't simply switch from external to internal demand as a driver at the click of a finger (or mouse, if you make your financial transactions online). Another economist who mailed me this morning said this:
  
  "I don't cover China so unfortunately, my views on that country are not very informed, but I do agree with your point about the China internal consumption argument. In my opinion, the belief that domestic consumption will take over from exports as a growth engine is nothing more than myth. Perhaps I'm misunderstanding the argument, but when factories and the export sector, in general, are bleeding jobs, it would be rather odd for internal consumption to take off at this point in time."
  
  So what is happening to exports? Well, China’s exports fell the most in nearly a decade in December, with shipments down by 2.8 percent over December 2007. That compares with a 21.7 percent increase a year earlier. Over the whole of 2008 exports were up by 17.2 percent, a reduction on the 25.7 percent gain registered in 2007, and suggesting that the drop in the last two months of the year may have been very sharp indeed. Exports to the European Union, China’s biggest export market, fell 3.5 percent in December from a year earlier. Shipments to the U.S. dropped 4.1 percent. Imports dropped even more sharply - by 21.3 percent, meaning the trade surplus failed to fall, and at $39 billion it remained the second-biggest on record.
  
  And China's declining imports are also being felt elsewhere, since in Japan's December trade report (which was out this morning, and was a complete horror story) we find that exports to China were down 35.5 percent year on year.
  
  So to some up, while it may well be true that China is not (yet) entering the Second Great Depression, I am arguing that China is really going to be one of the worst case scenarios in the current global recession, and that consensus thinking still has a very very long way to go in catching up with events in the China case.