Wednesday, September 26, 2012

Bloomberg: BRICs Biggest Currency Depreciation Since 1998 To Worsen
CNNMoney: Will China’s Real Estate Bubble Burst?
FT: China Manufacturers Face Fall in Demand
FT: Chinese Manufacturing Hits Nine-Month Low
FT: China Moves to Lift Property Market
FT: Chinese Property Market Rebounds
FT: Fate of China Property is Global Concern
HSBC: HSBC China Manufacturing PMI
National Bureau of Statistics of China: Sales Prices of Residential Buildings in 70 Medium and Large-sized cities in July
Reuters: China Factor Surveys Signal Economic Growth Easing into Q3
WSJ: Murky Outlook for Dim Sum Market
WSJ: Wage Rises in China May Ease Slowdown
WSJ: Yuan is Luring Bets of a Drop

China’s Economy Shows Signs of Strain

Recent economic indicators show that China’s economic growth was much slower than expected in the first half of this year, and analysts predict that gross domestic product (GDP) growth will slow again next quarter to somewhere below 7.5%—GDP grew 7.6% in the second quarter. Two important issues affecting the Chinese economy are: (1) increased government restrictions in the housing industry, and (2) decreased demand for Chinese products. These relatively poor economic numbers have led the Chinese government to engage in economic stimulus measures such as interest rate cuts and increased spending on investment projects.

Concerns about a housing bubble (rapid increase in housing prices) in China’s developed cities have led the government to clamp down on the housing sector by prohibiting purchases of second homes, toughening mortgage qualifications, imposing residency restrictions, and increasing down payments on property. The housing market in China’s most developed cities, where housing prices are high, accounts for only 25% of the market as a whole. In the rest of the country (the other 75% of the market), however, housing prices are relatively affordable. Yet, government policies designed to correct housing prices in China’s largest cities are discouraging developers from building houses in the rest of the country because the policies lower developers’ profit margins, particularly in rural areas. Moreover, people are discouraged from buying homes due to purchasing restrictions, and many investors do not want to purchase new real estate when property values are on the decline. Decreases in home construction and sales hurt the Chinese economy because property construction accounts for 15% of China’s GDP, and about 10% of economic growth last year is directly attributable to the housing sector. Furthermore, reduction in property construction has a domino effect upon other industries, including steel, heavy machinery manufacturers, and the energy sector.

China’s manufacturing sector already faces tough challenges because demand for Chinese products is decreasing. In the first half of the year, wages for Chinese workers went up 13% from last year, and analysts expect wages to double by 2015 from 2011 levels and triple by 2017. Companies must increase the prices of their products to account for these wage increases. Consequently, many foreign consumers now order these goods from other Asian countries where wages and prices are lower. For example, Euro zone, American and Russian demand for Chinese exports dropped 30% this year. HSBC’s purchasing manager’s index (PMI) (number that is calculated based on purchasing executives’ responses to questionnaires regarding new orders, output, employment, suppliers’ delivery times, and stock of items purchased) for China’s manufacturing sector was posted at 47.6 in August, its lowest level since March 2009, and down from 49.3 in July. Any number below 50 indicates that the manufacturing sector is contracting. HSBC also reported that new orders for goods had declined along with the number of manufacturing jobs. If low demand for Chinese products continues, many more Chinese workers will lose their jobs, which could strain China’s domestic market because these workers will purchase fewer goods.

The Chinese government is introducing various policies to help address the problems in the housing and manufacturing sectors. To help the housing sector, the government has been subsidizing the construction of millions of apartments. However, somewhere between ten and sixty-five million apartments remain empty due to the government’s purchasing restrictions. Chinese Premier Wen Jiabao has also promised to give exporters a tax rebate to help ease the pressure on the manufacturing industry. Furthermore, the government has cut interest rates twice this year, approved numerous investment projects, and lowered the amount of money that Chinese banks must keep on hand. Such measures should encourage lending and development projects. Many analysts also predict that the Chinese government will employ monetary easing policies such as lowering interest rates on loans even further and increasing the money supply. This will make Chinese exports more affordable on the world market because the value of the yuan against foreign currencies will decrease.


jim rogers farmland said...

I wonder if the drop in the Chinese Yuan will fuel more trade tensions with the US and EU?


China appears to be slowing down.