China – A Drag on Asian Economies

Europe sovereign debt crisis may have dragged the euro-zone into a deeper contraction while growth in China is beginning to sag given that the European Union is its biggest export market.

Any more softer than expected economic data from China and the euro-zone could have catastrophic implications for the global economy, with Singapore and Hongkong to be the worse affected among Asian economies.

China service sector growth had slowed in November to its slowest pace in 3 months, and manufacturing sector had contracted for the first time in 3 years as the Purchasing Manager Index (PMI) slipped to 49.0, the lowest since February 2009.  However, with simultaneous fears of inflationary pressure, China must pivot around and address growth. This, thus, helps reinforce suggestions that the People’s Bank of China (PBoC) will have to fine-tune monetary policies, again, in the months ahead.

China depends heavily on capital spending which tends to be volatile and has a strong multiplier effect on the economy.

The move by PBoC on 30 November to lower reserve ratio requirements for some banks is to make sure that the economy maintains its ability to grow as it faces a different period, inspired mainly by the slowdown in Europe’s demand for China’s products.

Economists have been cutting their growth forecast for China for 2012, with many predicting the slowest pace of growth in more than a decade due to Europe’s ongoing debt woes and a correction in the country’s real estates market and contracting exporting orders.  The Asian Development Bank lowered its growth forecast for China for 2012 from 9.1% to 8.8%, while other economists forecast between 7.9% to 8.6%.

The double whammy of a real estates market correction and slowdown in exports is, indeed, raising extreme concerns of an inevitable “hard landing” for China in 2012.

China’s export sector, the key driver of economic growth, is set to suffer more setbacks in the coming months as Europe debt crisis worsen and consumer spending in the United States remains weak. Its export growth of 15.9% in October was its most sluggish in 8 months, and also the slowest since November 2009. As export declines, so does the manufacturing sector. This has led to many recent social unrests as workers fear for their jobs.

A global crisis would increase risk aversion and outflow of capital and tighter credit conditions, while fiscal and monetary response to the 2008 crisis meant policymakers had less tools to stimulate economies. The major economic stimulus package of 4 trillion yuan introduced in the 2008 crisis had resulted in a debt crisis for the local governments. As such, any stimulus package to be introduced this time round would seem highly unlikely.

Indeed, a combination of escalating cost pressures at home and lack of improvement in the European and United States economies points to severe economic conditions ahead for China and its exporters in 2012.

Further Reading:

1. Bloomberg Poll : Investors Predict China Bank Crisis

2. Further Relevations of China’s Impending Banking Crisis

3. China Alarms Go Off

4. Beijing Can’t Use Its Reserves to Save the Banks