Will China slow down from 2009?

February 11th, 2008

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Yesterday, we talked to a retiree from China. From what we heard from him, it seemed that he felt that the Chinese economy is not doing too well recently. When we asked why, he could not really point a finger at the reason. But after some probing, it looked that the wobbly stock market was the cause of the turn in sentiment. When the conversation turned to property, we learned that young Chinese are burdened with crushing debt too. In Shanghai, an apartment that is located conveniently near the city can cost around 1 million yuan. A young Chinese couple with a modest combined salary of say, 120,000 yuan a year and a deposit of say, 300,000 yuan from their parents have to borrow around 700,000 yuan. From the anecdotal hearsay, it looks to us that like Australia, China is vulnerable to debt deflation too. Further hearsay tells us that the Chinese banking and financial system is relatively opaque and there are probably a lot of hushed up bad debts piling up. There are also widespread popular expectations that the Chinese economy will slow down after the Olympics.

Turning away hearsay to official assessment, Chinese Premier Wen Jiabao warned that 2008 will be a most difficult year and said that

There are uncertainties in international circumstances and the economic environment, and there are new difficulties and contradictions in the domestic economy.

Back in December last year, as we mentioned in Will the Chinese really tighten?, China had already announced plans for a ‘tight’ monetary policy in 2008. Even turning further back to March last year, in China to pull the plug?, we quoted Premier Wen Jiabao saying that the Chinese economy is “unstable, unbalanced, uncoordinated and unsustainable.” We speculated that

… we can expect significant policy changes in China that will shift focus from the economy to the environment and social stability. This means the Chinese government will take steps to slow economic growth significantly in order for the non-economic aspects of the nation to catch up and for the economy to catch a breather.

Also, it is open knowledge that China is planning a broad industry and power shutdown for the Beijing Olympics, which is certain to slow the economy significantly.

Turning away from official assessments to economic theory, we argued in Can China really ?de-couple? from a US recession? that China will not be able ‘de-couple’ from a recession in the US.

Dear readers, do you see what we are trying to mean? Make no mistake about this: the Chinese economy will slow down appreciably for the Olympics. We believe it will not be just a quick and temporary once-off slowdown- rather it will be a time for the Chinese economy to take a breather and cool down significantly, both by the design of the Chinese government and the effects of a US recession. The giddy and euphoric economic growth of 2007 will not be so ecstatic in 2008 and beyond (but not forever, we guess- but touch wood, if China fall into total social breakdown, then all bets are off… again, touch wood).

The question is: will this slowdown descend into an unexpected rout (i.e. a hard landing)? We do not really know, but we suspect it is a possibility that cannot be ignored (see Can China really ?de-couple? from a US recession?). But whatever the outcome of the Chinese slowdown, Australia will be affected greatly for the worse. With such high debt levels (see Aussie household debt not as bad as it seems?), the results will probably be ugly.

Be warned. Now is not the time to go further into debt. Personally, we are preparing for the coming lean years.