This could spell big trouble to the global economy if the PRC can't help pick up some of the slack in the global economy. http://blogs.moneycentral.msn.com/topstocks/archive/2009/01/12/the-big-china-recession.aspx The big China recession Posted Jan 12 2009, 07:16 AM by Douglas McIntyre The way that the Chinese GDP was going to roll forward to become the No.1 economy in the world was relatively simple. An expanding global need for cheap goods would drive a massive export machine. An expanding middle class would become rabid consumers of items made both overseas and within China. The system was fool-proof. Even remarkably intelligent economists and journalists talked and wrote about "the Chinese Miracle." In 2007, the nation's GDP was $3.2 trillion, but was growing at 11%. U.S. GDP was well over $14 trillion that year, but its growth rate was 3%. It was only a matter of time before the lines crossed. China has been able to draw upon a huge reserve of rural labor. People have moved from rural China to a number of large industrial cities in the interior of the country, many of which now have populations in the millions. Factory complexes were built in these same areas. As long as demand for output moved up, the labor forces in these regions grew. China created its own middle class which made and consumed goods at record rates. The central government has believed that as the demand for exports softened recently due to the global recession, the country's new middle class would continue to help GDP growth through consumption. The plan has fallen apart like a cheap watch. According to The Wall Street Journal, "China's exports in December fell 2.8% from a year earlier to $111.16 billion, while imports in the month fell 21.3% to $72.18 billion." What was unimaginable a year ago has now happened. China has entered a recession and it may end up being deeper than the one in the U.S. It is not clear that the government can mount and manage a plan to create about 10 million new jobs. This will be an even more difficult task if exports continue to fall sharply. China does not have a service industry which is anywhere close to being as large a part of the GDP as it is in the U.S. The illusion developed over the last decade was that China had become an independent power with a population which could make and consume goods at levels which have never been seen before. During the last two quarters, it has become clear that the the opposite is true. China's economy may be the most dependent large economy on earth. If GDP in the U.S., EU, and Japan contract at 5% this year, China's economy is very likely to shrink faster. It will be faced with a sharp drop in what it makes and exports. More importantly, large numbers of Chinese are leaving the huge new industrial cities and going back to rural regions where they can at least find work growing their own food. What is more than a trickle now could become a flood. Those who have gone back to non-industrialized sections of the country will not be net consumers at all. With a short-lived and dwindling middle class, China no longer has the economic core to continue the "miracle." China has just become another big country in trouble. Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.
The US has a $10 Trillion Dollar debt. The EU isn't in much better shape. Japan is in far worse shape. China has $1 Trillion in the bank. They can afford to run deficits to build infrastructure, while the US only can do so if lenders are willing to keep lending at 0-0.25%.
"If GDP in the U.S., EU, and Japan contract at 5% this year, China's economy is very likely to shrink faster." I do not believe this is accurate. China will still grow, but instead of 12% growth they will have like 5% growth. Or so I have read.
Not necessarily, "recession" can be defined in different ways. Look at this article: http://www.bloomberg.com/apps/news?pid=20601087&sid=axvq3QJvrtu4&refer=home "China’s growth may slow to 5 percent this year, less than half of the 11.9 percent expansion in 2007, according to Royal Bank of Scotland Plc. That would be the weakest pace since 1990 and the aftermath of the Tiananmen Square crackdown. "
Most estimates are that China grew 6-8% last year (I think their official number that no one believes is 9%). Just like the US apparently officially entered recession Q1 2008, despite positive GDP growth for that quarter and the one after that. I think "recession" is more of a descriptive term these days.
Doesn't the Chinese economy have to grow at like 10% to keep unemployment constant because of the number of rural citizens moving to the cities? I'd still say that they are better positioned to weather a recession as long as they act in their own interests, but I can see how a recession would hurt more.
Thanks for the clarification. I had the feeling 'recession' wasn't being used in the technical definition we use in the US but was wondering. Still from reading the article you posted it sounds like if the PRC can't make it to 8% growth that will cause many problems including social unrest. If that happens I don't think we can expect them to help bailout the global economy.
The PRC has tons of cash to burn through if it has to. It can weather the storm for a pretty long time in terms of creating jobs through gouvernment expenditure etc. Besides, this actually rectifies one of the great imbalances of the modern economy; China's absolute, dogged determination to save rather then spend while the US rushes to spend rather then save was causing an immense trade deficit that couldn't be sustained in the long run. So in a way, there are some positives about the situation.
Cash in bank means they're fine. They are only affected by a global financial crisis. How many times is that going to happen? All the countries with cash in the bank NOW are going to look great in Q1 2010.
8% is their own magic number without any solid basis, but they've been boosting it so heavily to the point where a lack in confidence would surface if they fail to reach that number.
I question whether it's even a real issue or whether it would correct itself. The thought is that 8% growth would satisfy the additional job requirements because of urbanization, but if there were 5% growth, would urbanization slow down? Kinda like the illegal alien "invasion" in the US is down to a trickle because of the scarcity of jobs that "'Mericans won't do".
I think it's more of a nominal thing then anything. China's put it out there are a baseline and as our good friend Ari Gold says; "Expectations, you beat ‘m by a dollar, life is great. Get under by a dollar, put a gun in your mouth and make sure I’m standing behind you."
from what i understand our biggest foes (communist chinese and oil shieks) are the only ones with cash reserves i rememeber reading about british pm running to the arab gulf to beg them to help bail out the world economy with there cash reserves which only arabs and chinese have we might need to be a lil nicer to our enemies i think that chinese guy was right. we no longer can dictate to the rest of the world what to do and how to do it. some humble pie and a more friendly posture is needed i hope obama is the right guy for that with the world already welcoming of him
I think part of the problem is that the PRC can't simply reverse the population shifts that have occurred and expect that many of the people who have migrated to the cities can go back to the country. There has almost always been a scarcity of arable land in China and while life for many migrant Chinese workers isn't great in the cities its better than rural life in much of China and if many of them go back there's going to be huge problems as more people try to eke out a living out already limited arable land.
BS article about the chinese recession, when the GDP growth is still positive and predicted to be positive for 2009. I thought a a recession was 2 quarters of negative growth.
NBER: "A significant decline in [the] economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." The two straight quarters of negative growth is far from accurate. If we use that definition, the US is currently not in a recession (yet), nor was it in one in 2000 - 2001. But yeah, the Chinese economy is not in a recession by any stretch of the imagination. For one thing, the problem is not widespread in the economy yet.
If we are to believe conspiracy theorists, somewhere between the early 90's and now, China went from allegedly inflating the economy to massively understating the the economy to avoid overheating. Of course, none of such theorists ever provided proof, which even if true, merely would bring the "spread" of the "real economy" closer to stated figures. The 8% figure also isn't a GDP estimate. It is a target, i.e. something challenging but not impossible.
